Bombay High Court
Sun Tan Trading Co Ltd vs The Deputy Commissioner Of Income Tax ... on 2 February, 2024
Author: K.R. Shriram
Bench: K. R. Shriram, Neela Gokhale
2024:BHC-OS:2049-DB
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.806 OF 2016
WITH
WRIT PETITION NO.261 OF 2016
Sun Tan Trading Co. Ltd., )
602 Parag Building, 6th Floor, 27 Peddar Road, )
Mumbai - 400 026 ) ....Petitioner
V/s.
1. The Deputy Commissioner of Income Tax, )
Circle 1(3)(1), Mumbai, )
540, Aayakar Bhavan, M.K. Road, )
Mumbai - 400 020 )
2. The Addl. Commissioner of Income Tax 1(3), )
Aayakar Bhavan, M.K. Road, )
Mumbai - 400 020 )
3. The Commissioner of Income Tax-I, )
Aayakar Bhavan, M.K. Road, )
Mumbai - 400 020 )
4. Union of India )
Through the Secretary, Dept. of Finance, )
Ministry of Finance, Govt. of India, )
North Block, New Delhi - 110 001 ) ....Respondents
WITH
WRIT PETITION NO.271 OF 2016
Sun Tan Trading Co. Ltd., )
602 Parag Building, 6th Floor, 27 Peddar Road, )
Mumbai - 400 026 ) ....Petitioner
V/s.
1. The Deputy Commissioner of Income Tax, )
Circle 1(3)(1), Mumbai, )
540, Aayakar Bhavan, M.K. Road, )
Mumbai - 400 020 )
2. The Commissioner of Income Tax-1, Mumbai, )
Aayakar Bhavan, M.K. Road, )
Mumbai - 400 020 )
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3. Union of India )
Through the Secretary, Dept. of Finance, )
Ministry of Finance, Govt. of India, )
North Block, New Delhi - 110 001 ) ....Respondents
----
Mr. P.J. Pardiwalla, Senior Advocate a/w. Mr. Madhur Agrawal i/b. Mr. Atul
K. Jasani for petitioner in all petitions.
Mr. P.C. Chhotaray for respondents - Revenue in all petitions.
----
CORAM : K. R. SHRIRAM &
DR. NEELA GOKHALE, JJ.
DATED : 2nd FEBRUARY 2024
ORAL JUDGMENT (PER K.R. SHRIRAM, J.) :
WRIT PETITION NO.806 OF 2016
1 Petitioner is engaged in the business of import and distribution
of alcoholic beverages in India. By this petition petitioner is challenging
notice dated 28th March 2014 issued by respondent no.1 under Section 148
of the Income Tax Act, 1961 (the Act) to reopen the assessment for the
Assessment Year 2007-2008 and an order dated 29 th September 2015
passed by respondent no.1 rejecting the objections of petitioner objecting to
the reassessment proceedings.
2 Petitioner had entered into Distribution Agreement dated
30th July 2001 with various entities, who are collectively referred to as
"Diageo group companies", for distribution, marketing and sale of imported
alcoholic beverages in India. As per the Distribution Agreement, petitioner
was under an obligation to distribute, market and sell alcoholic beverages
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in India. Petitioner was also required to engage or maintain adequate and
properly trained personnel, effective distribution network, etc. The
Distribution Agreement also provided the rates at which alcoholic beverages
would be sold to petitioner. It also provided that petitioner shall undertake
appropriate advertisements, merchandising promotion, packing and
consumer research with respect to the products sold in India.
3 Petitioner also had entered into an Agreement dated
20th September 2001 with UDV India Limited, now known as Diageo India
Pvt. Ltd. (DIPL) by which DIPL was to render services to petitioner with
respect to the marketing and sales of imported alcoholic beverages (Bottled
in Origin/BIO).
4 As and when the alcoholic beverages were imported by
petitioner, petitioner paid the customs duty based on the transaction value
of the goods imported. The Customs Authority alleged that the transaction
values were under stated and orders were issued to enhance the transaction
value of the goods imported by petitioner in India.
5 Aggrieved by the said order, petitioner preferred an appeal
before the Commissioner of Customs (Appeals), Mumbai [CC(A)] and
Assistant Commissioner of Customs, New Delhi. The CC(A), by an order
dated 21st March 2003 and the Assistant Commissioner of Customs, New
Delhi, vide order dated 29th August 2005, allowed the appeals of petitioner
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and concluded that petitioner was justified in paying customs duty on the
basis of the transaction price and the same could not be enhanced to the
prices at which the other importers are importing similar goods.
6 In the year 2009, an investigation was initiated by the
Directorate of Revenue Intelligence (DRI) for redetermination of the
assessable value of alcoholic beverages imported by petitioner in India for
determination of the customs duty payable on such beverages. Petitioner
received a show cause notice from DRI alleging that the customs duty on
the imported alcoholic beverages is under assessed.
7 To avoid prolonged litigation and to protect the reputation of
the business and for reasons of commercial expediency, petitioner decided
not to litigate the matter of valuation of imported goods and approached
the Settlement Commission of Customs and Central Excise for the
settlement of the dispute (the Settlement Commission). Petitioner made
detailed submissions before the Settlement Commission including that it
was being made for commercial expediency and to avoid prolonged
litigation, the CC(A) and Assistant Commissioner of Customs, New Delhi
have accepted that petitioner was justified in payment of the customs duty
on the imported price and the same could not be enhanced, petitioner was
not in breach of any provisions of law and petitioner is settling only to put a
closure to the matter. The Settlement Commission, by an order dated
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9th February 2012, settled the dispute of petitioner with the Customs
Department and held that petitioner was liable for additional customs duty
of Rs.58,04,28,400/- and interest of Rs.16,18,89,193/-. The Settlement
Commission held that as per the Distribution Agreement provided for
marketing and sales promotion expenses to be incurred by petitioner in
India, the import price provided in the agreement was not the sole
consideration for the import of goods and, therefore, the same is rejected as
the transaction value under Rule 12 of the Custom Valuation (Distribution
of Value of Imported Goods) Rule, 2007 and Rule 10-A of the Customs
Valuation Rules (Distribution of Value of Imported Goods) Rules, 1988. The
Settlement Commission further held that the transaction value should be
taken as the value at which the other parties are importing identical goods
at the same point of time.
8 In the meantime, on 31st October 2007 petitioner filed its
return of income for the Assessment Year 2007-2008 declaring a total
income of Rs.2,61,31,830/-. Petitioner's return of income was processed
under Section 143 (1) of the Act vide intimation dated 23 rd February 2008.
Thereafter, petitioner received a notice dated 28 th March 2014 under
Section 148 of the Act stating that respondent no.1 had reason to believe
that income for the Assessment Year 2007-2008, which is chargeable to tax,
has escaped assessment within the meaning of Section 147 of the Act.
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Petitioner was also provided with reason to believe. Petitioner, by a letter
dated 1st October 2014, filed its objections to the initiation of reassessment
proceedings. The objections were disposed by respondent no.1 without
giving any reasons and, therefore, petitioner filed Writ Petition being Writ
Petition No.459 of 2015 challenging the reassessment proceedings. By an
order dated 23rd July 2015 this Court disposed the petition holding that the
order disposing the objection was a perfunctory order. The Court set aside
the order dated 15th January 2015 and remanded the matter for denovo
consideration.
9 Following that, respondent no.1 passed a fresh order dated
29th September 2015 once again rejecting petitioner's objections holding
that (a) although proceedings were going on before the Customs
Departments, petitioner did not disclose such facts before the Income Tax
Department, (b) certain expenses allegedly incurred by petitioner, as
directed by DIPL, were not allowable as deduction under Section 37(1) of
the Act as these expenses are not incurred for the business of petitioner,
(c) there is no change of opinion for the relevant assessment year as the
return was processed under Section 143(1) of the Act, (d) respondent no.1
rejected the argument of petitioner that there is no nexus between the
customs duty paid by petitioner and sales promotion and other related
expenses incurred by petitioner. Respondent no.1 held that the Settlement
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Commission has held that the sales promotion and related expenses were
forming part of the cost of the beverage, (e) respondent no.1 also rejected
the objection of petitioner that the sales promotion expenses was incurred
by petitioner company on its own account. Respondent no.1 held that the
said expenditure were incurred as per the direction of the DIPL and,
therefore, were not relatable to the business of petitioner and, hence, not
allowable under Section 37 of the Act and (f) in view of the aforesaid,
respondent no.1 was justified in forming a prima facie belief about the
escapement of income after the notice of the Settlement Commission order.
It is against this order together with notice originally issued under Section
148 of the Act, this petition has been filed.
10 At the time of admission of the petition, on 10 th March 2016,
this Court was pleased to pass the following order :
xxxxxxxxxxxxxx
2. Rule. Respondents waive service.
3. These three Petitions challenge three reopening notices all
dated 28.3.2014 issued under Section 148 of the Income tax
Act, 1961 (Act) by the Assessing Officer. Impugned Notices
seek to reopen the assessments for the Assessment Years
2007-2008, 2008-2009 and 2009-2010. The reasons for
reopening as recorded and communicated for all the three
Assessment Years are identical i.e. the order dated 9.2.2012
passed by the Customs and Central Excise Settlement
Commission (Commission) which enhanced the transaction
value of the liquor imported by the Petitioner during the
period November, 2004 to November, 2009. This resulted in
payment of further differential duty of the Customs of
Rs.58.04 Crores. The customs duty, which was paid on the
aforesaid imports consequent to the enhancement of the
value of the imported goods was reimbursed by the foreign
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supplier and no deduction on that count has been claimed by
the Petitioner. The reasons in support of impugned notices
seek to disallow expenditure in the aggregate of Rs.58.42
Crores for the three years on account of advertisement, sales
promotion, product display posters, etc. as not pertaining to
the business of assessee and, therefore, not allowable under
Section 37 of the Act. The Petitioner filed its objections to the
impugned notices inter-alia emphasing the fact that there can
be no reason to believe that income chargeable to the tax has
escaped assessment. These expenses have been incurred for
the purposes of Petitioner's business and any increase in
sales would benefit it. The fact that some other person may
also benefit, is not determinative for disallowing of
expenditure under Section 37 of the Act. The Revenue seek to
deny the claim for expenditure by placing reliance upon the
order of the Commission which inter-alia indicates that the
expenses which have been incurred for advertisement, etc.
would form a part of the transaction value for the imported
liquor. If it be so, prima-facie the expenses incurred would
form a consideration paid for the imported goods. Thus, it
would be cost of purchase and allowable as an expenditure.
4. Thus, prima facie, we are of the view that there can not be
any reason to believe that income chargeable to the tax has
escaped assessment.
5. In the above view, interim reliefs in terms of prayer clause
(d).
xxxxxxxxxxxxxx
11 Mr. Pardiwalla submitted as under :
(a) there can be no reason to believe because the prerequisite
conditions to assume jurisdiction under Section 148 of the Act has not been
met. The reasons, as recorded, cannot give respondent no.1 any belief that
income chargeable to tax has escaped assessment;
(b) the fact that additional customs duty paid by petitioner for
import of alcoholic beverages can in no way give any belief to respondent
no.1 that any income chargeable to tax has escaped assessment;
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(c) the sales promotion expenses have been incurred by
petitioner at its own discretion for the purpose of its own business as per
the Distribution Agreement entered into by petitioner with Diageo group
companies. The fact that additional customs duty has been paid by
petitioner can in no way lead to the conclusion that the sales promotion
expenses, etc. do not pertain to the business of petitioner and are not
allowable as deduction on account of violation of any law. Petitioner is
engaged in the business of distribution of alcoholic beverages and the sales
promotion and other expenses are incurred for the purpose of such business
and, therefore, the same is clearly relatable to the business of petitioner.
Moreover, in the affidavit in reply, in paragraph 3.1 itself it has been
admitted that petitioner was engaged in the business of importing and
trading in foreign made foreign liquors. Even the reasons recorded says
petitioner was engaged in import of alcoholic beverages from M/s. Diageo
Brands BV and petitioner was in the business of importing and trading in
foreign made foreign liquors. Therefore, the expenses proposed to be
disallowed under Section 37 of the Act certainly pertains to the business of
petitioner;
(d) petitioner has undertaken the obligation to incur the sales
promotion expenses as per the distribution agreement and, therefore, the
expenditure is clearly incurred for the purpose of the business of petitioner.
Merely because the Settlement Commission has revalued the purchase price
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of the goods to determine the value of the customs duty on account of
petitioner's undertaking the obligation to incur the sales promotion
expense, cannot lead to a conclusion that sales promotion expenditure has
not been incurred for the purpose of the business of petitioner;
(e) respondent no.1 erred in holding in the impugned order
that the sales promotion expenses were incurred by petitioner as per the
direction of DIPL, and, therefore, was not related to the business of
petitioner. The sales promotion expenses are admittedly related to the
business of petitioner and, merely because the same has been incurred at
the direction of another company, does not mean that the same will cease
to be expenditure relatable to the business of petitioner. If there is an
undervaluation of the import duty, the consequence of that will be that
petitioner would be liable to pay additional import duty but the same can in
no way lead to the conclusion that the expenditure incurred by petitioner
for selling the imported goods were incurred in violation of any law.
Therefore, respondent no.1 cannot have any reason to believe that income
chargeable to tax has escaped assessment;
(f) even on demurer, if it is accepted that the sales promotion
expenses are incurred by petitioner on behalf of Diageo, there is no reason
to believe that any income chargeable to tax has escaped assessment. In
such situation, the income of petitioner would be reduced to that extent as
it must follow that the purchase cost of petitioner was higher to that extent.
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Therefore, there is no question of any reason to believe that any income
chargeable to tax has escaped assessment;
(g) Respondent no.1 in the impugned order has accepted that
the sales promotion expenses should form part of the sale price of the
beverage sold by the Diageo Group to petitioner. Therefore, it is clear that
even if it is held that the sales promotion expenses are not allowable as
deduction under Section 37(1) of the Act on the ground that the same is
not incurred for the purpose of the business of petitioner, the same would
be allowed as cost of the purchases made by petitioner. Reliance by
respondent no.1 on the decision of the Madras High Court in the case of
Commissioner of Income Tax V/s. India Cements Ltd. 1 is completely wrong
as the facts in the said case are distinct from the facts in the present case. In
the said case, the assessee had paid remuneration to the managing agent in
contravention of the Companies Act and had claimed the same as an
allowable deduction under Section 37 of the Act. This Court has held that
remuneration payable to the managing agent was in excess of the limits
prescribed under Section 348 read with Section 349 of the Companies Act
and, therefore, to the extent of the excess remuneration, the same would
not be allowable as deduction under Section 37 of the Act. In the present
case, it is nobody's claim that the expenditure incurred by petitioner on
sales promotion, etc. is in contravention of any provision or statute and,
1 (2000) 241 ITR 62
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therefore, there is no question of disallowing the said expenditure incurred
by petitioner.
12 Mr. Pardiwalla also relied upon the following judgments :
(i) The Commissioner of Income Tax, Central - II V/s. M/s.
Multi Screen Media Pvt. Ltd.2
(ii) The Commissioner of Income Tax V/s. M/s. Star India P.
Ltd.3
(iii) The Commissioner of Income Tax - 11 V/s. M/s. Star India
(P) Ltd.4
(iv) Commissioner of Income Tax V/s. N.G.C. Network (India)
P. Ltd.5
(v) Sassoon J. David and Co. P. Ltd. V/s. Commissioner of
Income Tax, Bombay6
(vi) Prashant S. Joshi & Anr. V/s. Income Tax Officer & Anr.7
(vii) Neetu M. Chandaliya V/s. Income Tax Officer 14(2)(3)8
(vii) Ramona Pinto V/s. Deputy Commissioner of Income Tax9
(viii) Vaman Prestressing Co. Pvt. Ltd. V/s. Additional
Commissioner of Income Tax and Ors.10
2 Income Tax Appeal No.2057 of 2013 dated 16.11.2015
3 Income Tax Appeal No.165 of 2009 dated 24.03.2009
4 Special Leave Petition (Civil) No.14850 of 2010 dated 16.2.2022
5 (2014) 368 ITR 738 (Bom)
6 (1979) 118 ITR 261 (SC)
7 (2010) 324 ITR 154 (Bom)
8 (2023) SCC Online Bom 2046
9 (2023) 156 taxmann.com 282 (Bombay)
10 (2023) SCC Online Bom 1947
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13 Mr. Chhotaray submitted as under :
(a) petitioner cannot be stated to be engaged in the business of
distribution of alcoholic beverages;
(b) the Settlement Commission has revalued the purchase price
of the goods to determine the value of the customs duty on account of
petitioner's undertaking the obligation to incur the sales promotion expense
and, therefore, sales promotion expenditure has not been incurred for the
purpose of the business of petitioner;
(c) the sales promotion expenses were incurred by petitioner as
per the direction of DIPL, and, therefore, was not related to the business of
petitioner;
(d) there is undervaluation of import duty in violation of
Custom Rule. Therefore, as held in India Cements Ltd. (Supra), the
expenses having been incurred, in violation of law, the same were not
allowable as deduction under Section 37 of the Act;
(e) in determining whether the commencement of
reassessment proceedings was valid, it has to be only seen whether there
was prima facie material on the basis of which the Department could
reopen the case. The sufficiency or correctness of the material is not a thing
to be considered at this stage ( Raymond Woollen Mills Ltd. V/s. Income Tax
Officer and Ors.11). Since there is no assessment under Section 143(1) of
11 (1999) 236 ITR 34 (SC)
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the Act, the question of change of opinion does not arise. At the stage of
issue of notice, the only question is whether there was relevant material on
which a reasonable person could have formed a requisite belief. Whether
the materials would conclusively prove the escapement is not the concern
at that stage. This is so because the formation of belief by the Assessing
Officer is within the realm of subjective satisfaction ( Assistant
Commissioner of Income Tax V/s. Rajesh Jhaveri Stock Brokers P. Ltd. 12).
Since the Settlement Commission has made observations against petitioner,
it cannot be stated that the report of the Settlement Commission does not
constitute relevant material or that on that basis, the Assessing Officer
could not have reasonably formed the requisite belief ( Income Tax Officer
V/s. Selected Dalurband Coal Co. Pvt. Ltd.13);
(f) where detailed reasons have been recorded by the Revenue
in the satisfaction note, it could not be said that the reasons recorded did
not satisfy the prerequisite conditions of Section 132(1) of the Act
(Principal Director of Income Tax, Investigation V/s. Laljibhai Kanjibhai
Mandalia14). In Maddi Venkataraman and Co. (P.) Ltd. V/s. Commissioner of
Income Tax15, the Apex Court held that the asseesee had indulged in
transactions in violation of the provision of Foreign Exchange (Regulation)
Act. The assessee's plea was that unless it entered into such a transaction, it
12 (2007) 291 ITR 500 (SC)
13 (1996) 217 ITR 597 (SC)
14 (2022) 140 taxmann.com 282 (SC)
15 (1998) 229 ITR 534 (SC)
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would have been unable to dispose of the unsold stock of inferior quality of
tobacco. In other words, the assessee would have incurred a loss. The Court
held spur of loss cannot be a justification for contravention of law. The Apex
Court observed that the asseessee was expected to carry on the business in
accordance with law and that the expenditure incurred for evading the
provisions of the Act and also the penalty levied for such evasion cannot be
allowed as deduction.
This judgment, in our view, is not applicable because in that
case and also in India Cements Ltd. (Supra), the expenditure incurred were
in violation of the provisions of the FERA and Company Law and hence, the
Court held that it would be against public policy to allow the benefit of
deduction under one statute of any expenditure incurred in violation of the
provisions another stature or any penalty imposed under another statute. In
the case at hand, the expenditure claimed under Section 37 of the Act was
not for evading the Customs Act but admittedly was for the sales promotion
expenses incurred at its own discretion for the purpose of its own business
as per the Distribution Agreement with DIPL. Even if the sales promotion
expenses have been incurred at the direction of another company, it does
not mean that the same will cease to be expenditure relatable to the
business of petitioner;
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(g) Mr. Chhotaray also relied upon Income Tax Officer V/s. Biju
Patnaik16 to submit that even if the notice or the reason to believe does not
disclose the satisfaction of the requirement of Section 147 of the Act, if
from the averments in the counter affidavit it is clear that the Income Tax
Officer had applied his mind to the facts and after prima facie satisfying
himself of the existence of two conditions reached the conclusions for
reopening the assessment, it being an administrative action, the notice or
order does not per se become illegal. It is open to the assessee to place all
necessary material facts and the Income Tax Officer is free to consider the
material and make a decision in that regard. Relying on Sri Krishna Pvt.
Ltd. V/s. Income Tax Officer17, it was submitted that the enquiry at the
stage of finding out whether the reassessment notice is valid is only to see
whether there are reasonable grounds for the Income Tax Officer to believe
and not whether the omission/failure and the escapement of income is
established. It was also submitted that as was done in that case, this Court
can call for the records and proceedings to verify the veracity of the reasons
recorded by the Assessing Officer.
FINDINGS :
14 On a proper reading of the reasons recorded for alleged
escapement of income, it emanates that the sole basis on which the
Assessing Officer seeks to disallow expenditure in the aggregate of Rs.58.42
16 188 ITR 247
17 221 ITR 538 (SC)
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Crores for the three years (Rs.6,73,73,981/- for Assessment Year 2007-
2008) on account of advertisement, sales promotion, product display
posters, etc. was it did not pertain to the business of assessee and,
therefore, not allowable under Section 37 of the Act.
15 What we need to consider is, (a) whether there was any basis
for respondent no.1 to form a belief that any income chargeable to tax has
escaped assessment within the meaning of substantive provisions of Section
147 of the Act?
(b) Whether the expenditure incurred for promoting the
business to earn profits can be claimed as deduction under Section 37 of
the Act even though somebody other than assessee is also benefited by the
expenditure?
(c) Whether the Assessing Officer in the reassessment
proceedings can disallow the expenditure to the extent of Rs.58.42 Crores
for the three years (Rs.6,73,73,981/- for Assessment Year 2007-2008) out
of the advertisement and sales promotion expenses even if it is incurred on
the directions of Diageo?
The fact that the expenses incurred by petitioner were for
advertisement and sales promotion, is not in dispute.
16 In Prashant S. Joshi (Supra) the Division Bench of this Court
held that the Assessing Officer must have reasons to believe that income
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has escaped assessment and at that stage an established fact that income
has escaped assessment is not required. The only question, at the stage of
issuing notice is whether there was relevant material on which a reasonable
person could have formed a requisite belief and whether the materials
would conclusively prove the escapement is not the concern at that stage
because formation of belief by the Assessing Officer is within the realm of
subjective satisfaction. The Court held at the same time the touchstone to
be applied is whether there was reason to believe that income had escaped
assessment. The Division Bench also held that the act of taking notice
cannot be at the arbitrary whim or caprice of the Assessing Officer and must
be based on a reasonable foundation. The sufficiency of the evidence or
material is not open to scrutiny by the court but the existence of the belief
is the sine qua non for a valid exercise of power. In the facts and
circumstances of that case, the Division Bench held that it was impossible
for any prudent person to form a reasonable belief that the income had
escaped assessment.
In Commissioner of Income Tax V/s. Kelvinator of India Ltd. 18
the Hon'ble Apex Court held that the Assessing Officer has power to reopen
provided there is tangible material to come to the conclusion that there is
escapement of income from assessment. The reasons must have a live link
with the formation of the belief.
18 (2010) 320 ITR 561 (SC)
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In Export Credit Guarantee Corporation of India Ltd. V/s.
Additional Commissioner of Income Tax and Ors. 19, the Court held that
when an assessment is sought to be reopened within a period of four years
from the end of the relevant assessment years, the test to be applied is
whether there is tangible material to do so. What is tangible is something
which is not illusory, hypothetical or a matter of conjecture. An Assessing
Officer who has plainly ignored the relevant material and arrived at an
assessment acts contrary to the law. If there is an escapement of income in
consequence, the jurisdictional requirement of Section 147 of the Act would
be fulfilled on the formation of a reason to believe that income has escaped
assessment.
Did the Assessing Officer have any tangible material to reopen
the assessment in this case is a question which we have to answer.
Having considered the reasons recorded, the only basis to
disallow expenditure in the aggregate of Rs.58.42 Crores for the three years
on account of advertisement, sales promotion, product display posters, etc.
was it was not pertaining to the business of assessee and, therefore, not
allowable under Section 37 of the Act. It is evident that there was
absolutely no basis to respondent no.1 to form a belief that any income
chargeable to tax has escaped assessment within the meaning of substantive
provisions of Section 147 of the Act. As held by this Court in Prashant S.
19 (2013) 350 ITR 651 (Bom)
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Joshi (Supra), Explanation 2 to Section 147 creates a deeming fiction of
cases where income chargeable to tax has escaped assessment. Clause (b)
deals with a situation "where a return of income has been furnished by the
assessee but no assessment has been made and it is noticed by the Assessing
Officer that the assessee has understated the income or has claimed
excessive loss, deduction, allowance or relief in the return." For the purpose
of Clause (b) to Explanation 2, the Assessing Officer must notice that the
assessee has understated his income or has claimed excessive loss,
deduction, allowance or relief in the return and taking of such notice must
be consistent with the provisions of the applicable law. It cannot be at the
arbitrary whim or caprice of the Assessing Officer and must be based on a
reasonable foundation. Though the sufficiency of the evidence or material is
not open to scrutiny by the court but the existence of the belief is the sine
qua non for a valid exercise of power. Paragraph 20 of Prashant S. Joshi
(Supra) reads as under :
20. For all these reasons, it is evident that there was
absolutely no basis for the first respondent to form a belief
that any income chargeable to tax has escaped assessment
within the meaning of the substantive provisions of Section
147. Explanation 2 to section 147 creates a deeming fiction
of cases where income chargeable to tax has escaped
assessment. Clause (b) deals with a situation "where a return
of income has been furnished by the assessee but no
assessment has been made and it is noticed by the Assessing
Officer that the assessee has understated the income or has
claimed excessive loss, deduction, allowance or relief in the
return." For the purpose of clause (b) to explanation 2, the
Assessing Officer must notice that the assessee has
understated his income or has claimed excessive loss,
deduction, allowance or relief in the return. The taking of
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such notice must be consistent with the provisions of the
applicable law. The act of taking notice cannot be at the
arbitrary whim or caprice of the Assessing Officer and must
be based on a reasonable foundation. The sufficiency of the
evidence or material is not open to scrutiny by the Court but
the existence of the belief is the sine qua non for a valid
exercise of power. In the present case, having regard to the
law laid down by the Supreme Court it was impossible for
any prudent person to form a reasonable belief that the
income had escaped assessment. The reasons which have
been recorded could never have led a prudent person to form
an opinion that income had escaped assessment within the
meaning of section 147. In these circumstances, the petition
shall have to be allowed by set- ting aside the notice under
section 148.
17 In N.G.C. Network (India) P. Ltd. (Supra), the following two
questions of law were considered :
(a) Whether in the facts and circumstances of the case and in
law, the Hon'ble ITAT is justified in confirming the order of
the Commissioner of Income Tax (Appeals) deleting the
disallowance of Rs.4,14,20,843/- made by the Assessing
Officer out of advertisement and publicity expenses incurred
by the Assessee?
(b) Whether in the facts and circumstances of the case and in
law, the Hon'ble Income Tax Appellate Tribunal was justified
in not taking cognizance of the transfer pricing provisions
because, the expenditure incurred by the Assessee by way of
advertisement and publicity expenses, substantially benefited
the two foreign principals and the Assessee did not receive
any compensation on that account from the foreign
principals and whether upon the aforesaid consideration, the
Hon'ble Income Tax Appellate Tribunal was justified in not
upholding the order of the Assessing Officer?
In that case during the assessment proceedings, the Assessing
Officer observed that the assessee's expenditure under head "Advertising
and Publicity Expenses" of Rs.6,21,31,262/- was claimed as deduction
under Section 37(1) of the Act. The Assessing Officer noted that respondent
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had incurred expenses towards advertising and publicity which benefited
not only the assessee but also the foreign principals and held that the entire
amount was not allowable as deduction under Section 37(1) of the Act. The
Assessee submitted that the amount spent for the benefit of the assessee but
for the promotion of channel, the distribution rights will not generate
sufficient returns since the promotion and publicity alone help garner
higher income and, therefore, the deduction under Section 37 of the Act
could not be affected. Relying on the decision of Sassoon J. David and Co. P.
Ltd. (Supra), it was submitted that merely because foreign principal was
benefited by advertising, promotion and publicity it will not prevent
respondent-assessee from claiming benefit of deduction under Section
37(1) of the Act. The Court held that the assessee was entitled to the
deductions even though foreign principal has also benefited by the
expenditure. Paragraphs 19, 21, 22 and 23 of the said judgment read as
under :
19. Having considered rival contentions we are in agreement
with Mr. Kaka. The main grounds on which the revenue has
questioned the order of the tribunal are (a) non disclosure in
form 3CEB of the fact that the principal is also a beneficiary
of the advertising expenses; (b) that the advertising and
promotional expenses are not wholly for the benefit of the
assessee but it also benefited the principal who was an
associated enterprise; (c) that advertising and publicity
expenses were far higher than the amount of revenue earned
and lastly, that although foreign principals i.e. Associated
Enterprise benefited from advertising and publicity no
compensation was paid by the foreign principals to the
assessee to avail of such benefits.
xxxxxxxxxxxxxxx
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21. The contention that the expenditure should have been
wholly and exclusive for the purpose of business of the
assessee under section 37(1) read with provisions of section
40A(2) as being excessive and unreasonable does not appeal
to us. There can be no doubt in the instant case, that in view
of decision of the Supreme Court in Sassoon David (supra) it
cannot be said that the expenditure was not wholly or
exclusively for benefit of the assessee. The mere fact that
foreign principals also benefited does not entail right to deny
deduction under section 37(1). Furthermore, it is seen that
all the amounts earned by the assessee were brought to tax,
especially in view of the fact that the payment of expenses
were made to Indian residents and there payments were not
required to be included in form 3CEB since Section 92 which
governs the effect of form 3CEB covers only international
transactions. Furthermore, it is seen that the respondents
income from subscription fee is variable and through
commission received on the advertising sales is 15% of the
value of ad-sales. The Assessing Officer's contention that the
assessee received fixed income is not justified and there is
certainly, in our view, a direct nexus between the amount
spent on advertising and publicity, and the appellant's
revenue.
22. Advertisers who advertise on these channels act through
media houses and advertising agencies and they work to
media plans designed in the manner so as to maximise value
for the advertiser. They will evaluate expenditure with
channel penetration in the market place inasmuch as only
channels with high viewership would justify the higher
advertising rates which is normally sold in seconds. Merely
having high quality content will not ensure high viewership.
This content has to be publicized. The great reach of the
publicity, the higher chances of larger viewership. The larger
the viewership, the better chances of obtaining higher
advertisement revenue. The higher advertisement revenue,
the higher will be commission earned by the respondent-
assessee. Accordingly, we have no doubt that there is a direct
nexus between advertising expenditure and revenue albiet
the fact that there may be a lean period before revenue picks
up notwithstanding high amount spent on such publicity.
This justifies the higher expenditure vis-a-vis revenue noticed
by the department.
23. It is also not necessary that the foreign enterprises must
compensate the Indian agent for the benefit it receives or it
may receive from the advertisement and promotion of its
channels by agent in India. The agent in India earns
commission from ad-sales and distribution revenue, both of
which have sufficiently compensated the assessee. We would
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not expect the revenue to determine the sufficiency of the
compensation received by the agent and as such we do not
find any justification in this ground either. In the
circumstances we answer questions of law (a), (b) and (c) in
the affirmative in favour of the assessee and against the
revenue. In the result the appeal is dismissed. No order as to
costs.
(emphasis supplied)
18 The Apex Court in Sassoon J. David and Co. P. Ltd. (Supra)
held that ordinarily it is for the assessee to decide whether any expenditure
should be incurred in the course of his or its business. Such expenditure
may be incurred voluntarily and without any necessity and if it is incurred
for promoting the business and to earn profits, the assessee can claim
deduction under the Act even though there was no compelling necessity to
incur such expenditure. The fact that somebody other than the assessee is
also benefited by the expenditure should not come in the way of an
expenditure being allowed by way of deduction under the Act if it satisfies
otherwise the tests laid down by law. The relevant portions read as under :
xxxxxxxxx It is relevant to refer at this stage to the
legislative history of section 37 of the Income-tax Act, 1961
which corresponds to section 10(2) (xv) of the Act. An
attempt was made in the Income-tax Bill of 1961 to lay down
the 'necessity' of the expenditure as a condition for claiming
deduction under section 37. Section 37(1) in the Bill read
"any expenditure....laid out or expended wholly, necessarily
and exclusively for the purposes of the business or profession
shall be allowed ...." The introduction of the word 'necessarily'
in the above section resulted in public protest. Consequently
when section 37 was finally enacted into law, the word
'necessarily' came to be dropped. The fact that somebody
other than the assessee is also benefited by the expenditure
should not come in the way of an expenditure being allowed
by way of deduction under section 10(2) (xv) of the Act if it
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satisfies otherwise the tests laid down by law. This view is in
accord with the following observations made by this Court in
The Commissioner of Income-tax, Madras v. Chandulal
Keshavlal & Co.
"Another fact that emerges from these cases is that if
the expense is incurred for fostering the business of
another only or was made by way of distribution of
profits or was wholly gratuitous or for some improper
or oblique purpose outside the course of business then
the expense is not deductible. In deciding whether a
payment of money is a deductible expenditure one has
to take into consideration questions of commercial
expediency and the principles of ordinary commercial
trading. If the payment or expenditure is incurred for
the purpose of the trade of the assessee it does not
matter that the payment may inure to the benefit of a
third party (Usher's Wiltshire Brewery Ltd. v. Bruce).
Another test is whether the transaction is properly
entered into as a part of the assessee's legitimate
commercial undertaking in order to facilitate the
carrying on of its business; and it is immaterial that a
third party also benefits thereby (Eastern Investments
Ltd. v. The Commissioner of Income-tax, West Bengal).
But in every case it is a question of fact whether the
expenditure was expended wholly and exclusively for
the purpose of trade or business of the assessee."
(emphasis supplied)
19 Therefore, even if petitioner has incurred any expenditure
towards advertisement, sales promotion, product display posters, etc. on
the direction of the DIPL and these expenditures might have benefited
Diageo as well, does not entail right to deny deduction under Section 37(1)
of the Act. It is unacceptable to even suggest that the expenses were not
incurred for the purpose of business of petitioner. This is because in the
affidavit in reply itself it is admitted that petitioner was engaged in the
business of importing and trading in foreign made foreign liquors. Even the
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reasons recorded states petitioner was engaged in import of alcoholic
beverages from M/s. Diageo Brands BV and petitioner was in the business
of importing and trading in foreign made foreign liquors. It is unacceptable
to even suggest that just because the DIPL directed how to conduct the
advertisement or sales promotion or that Diageo also benefited by the
advertisement and sales promotion would mean the expenses were not
incurred for the purpose of the business of petitioner. It is common
knowledge that advertising and sales promotion will ensure higher sales
and higher sales will ensure higher profitability to petitioner. There is no
doubt that there is a direct nexus between the expenditure incurred and the
business of petitioner.
20 In Biju Patnaik (Supra), that Mr. Chhotaray had relied upon in
the case before the Apex Court, the reasons were recorded by the Assessing
Officer in the order-sheet on 2nd July 1965 to state that although the
assessee had claimed that the transfer of business was made on 31 st March
1956, however, from the information available with the Assessing Officer, it
appears that the transfer of business took place on 3rd November 1956.
Thus, the assessee was liable to be taxed on the capital gain earned by the
assessee in the accounting year ending on 31st March 1957. The Assessing
Officer had, thereafter, issued a notice dated 31st July 1965 requiring the
assessee to deliver within 30 days the return of income in the prescribed
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form. The Hon'ble Apex Court held that :
It is undoubtedly true that the notice does not prima
facia disclose the satisfaction of the two conditions
precedent enjoined under section 147(a), but in the
counter - affidavit filed by the Income-tax Officer in the
High Court, he stated all the material facts. The
Respondent had inspected the record and the record also
bears out the existence of the material fact. The
proceedings drawn upon which are abstracted earlier
also show that Income-tax Officer has applied his mind
to the facts on record and was prime facie satisfied that
the reopening of the assessment for the assessment year
1957 - 58 was needed due to those stated facts.
The Hon'ble Apex Court further held that :
We reject the contention of Dr. Pal that the Income-tax
Officer has no reason to believe that income has
escaped assessment for the relevant accounting year for
the reasons mentioned by the Income-tax Officer in the
proceedings drawn on July 2, 1965. It is clear therefrom
that the escapement of assessment was on account of
omission or failure on the part of the Respondent to
disclose the material fact truly and fully.
21 In our view, Mr. Chhotaray has wrongly relied on the aforesaid
decision to suggest that this Court must look beyond the reasons recorded
to determine the validity of the notice issued under Section 148 of the Act.
The finding of the Hon'ble Apex Court, as extracted above, is that the notice
issued under Section 148 of the Act does not show the fulfillment of the
condition under Section 147 of the Act. However, to decide on the issue of
belief of the Assessing Officer, the Hon'ble Apex Court has referred to the
noting made by the Assessing Officer on 2 nd July 1965, which is equivalent
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to the reasons recorded by the Assessing Officer. The Hon'ble Apex Court
has on the basis of the said noting (reasons) concluded that the said
reasons reflect application of mind by the Assessing Officer and, hence, the
reopening was justified. It is not possible to interpret the decision of the
Hon'ble Apex Court as sought to be done by Mr. Chhotaray, i.e., to say that
the validity of the reopening is to be decided on the basis of not only the
reasons recorded but other material as well. If the interpretation as sought
by the Revenue is given then, it would lead to the recording of reasons
being an empty formality as the Assessing Officer would always be able to
justify the reopening by not only referring to the reasons but also
surrounding material and circumstances. The same can never be the
intention of the provisions of Section 147 of the Act, which specifically
provides that the Assessing Officer must have reason to believe that income
has escaped assessment. The approval is required under Section 151 of the
Act from the superior authority on the "reasons recorded" by the Assessing
Officer. This means that the superior authority under Section 151 of the Act
is giving the sanction/approval to reopen the assessment based on the
reasons recorded. If the view is taken that the validity of the reopening can
be considered beyond the reasons, the process of seeking the approval as
well as the approval which is based on the reasons would be rendered
invalid and otiose.
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22 Further, the Hon'ble Apex Court in the case of GKN Driveshafts
(India) Ltd. V/s. Income Tax Officer 20 has held that the process to be
followed in reopening cases is that once a notice under Section 148 of the
Act is issued, the assessee must file the return of income and, thereafter, the
reasons recorded by the Assessing Officer would be provided to the
assessee. The assessee can file its objection and the Assessing Officer is
thereafter bound to dispose of the objections by passing a speaking order.
The process prescribed by the Hon'ble Apex Court also proceeds on the
footing that the objections are required to be filed on the basis of the
"reasons recorded" by Assessing Officer and the Assessing Officer is
required to pass order justifying the reopening on the basis of the said
reasons. Therefore, if the Assessing Officer is allowed to justify the
reopening beyond the reasons, the whole process prescribed by the Hon'ble
Apex Court will also be rendered nugatory and infructuous.
23 Moreover, the Hon'ble Delhi High Court in the case of Alcatel -
Lucent France V/s. ADIT21 has held that the decision of the Hon'ble Apex
Court in the case of Biju Patnaik (Supra) was considering the
pre-amendment, i.e., before 1989 provision and the post amendment
provision has been explained by the Hon'ble Apex Court in the case of
Commissioner of Income Tax V/s. Kelvinator of India Ltd. 22 and, therefore,
20 259 ITR 19 (SC)
21 69 Taxmann.com 379 (Delhi)
22 320 ITR 561 (SC)
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the decision of Biju Patnaik (Supra) cannot be relied upon by the Revenue
post amendment.
24 As regards, Sri Krishna Pvt. Ltd. (Supra) relied upon by
Mr. Chhotaray to allege that it is open to the Courts to go beyond the
reasons to consider the validity of the reopening of the assessment, the
interpretation canvassed is also based on the misinterpretation of the
decision of the Hon'ble Apex Court. In this case, reasons were recorded to
the effect that a large number of loans obtained by the assessee were bogus
loans and an amount of Rs.11,51,275/- was added to the income of the
assessee in the assessment year 1960-1961. Similar loans were noticed for
the assessment year 1959-1960 amounting to Rs.8,53,298/- as per the
balance sheet and, therefore, Assessing Officer has reason to believe that
there was omission or failure on the part of the assessee - company to
disclose fully and truly all material fact necessary for assessment for the
assessment year 1959-1960. The case records were called for by the Hon'ble
Apex Court to verify the veracity of the reasons recorded by the Assessing
Officer, i.e., the reference to the term "similar loans" in the reasons means
loan from same persons as in the assessment year 1960-1961. Therefore,
the case records were called for by the Hon'ble Apex Court to verify the fact
mentioned in the reasons and not to justify the reopening beyond the
reasons as has been contended by the Revenue in the present case. This is
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further clear from the finding in placitum D at page 546, where the Hon'ble
Apex Court held that "We must presume that the Income-tax Officer did
find that a large number of alleged lenders who were found to be bogus
during the assessment year 1960-1961 were also put forward as lenders
during assessment year 1959-1960 as well. Evidently, this is what he meant
in the context, when he spoke of "similar loans" being noticed for the year
in question as well. In such a situation, it is impossible to say that the
Income-tax Officer had no reasonable grounds to believe that there has
been no full and true disclosure of all material fact by the assessee during
the relevant assessment year and that on that account, income chargeable
to tax has escaped assessment." It is nobody's case that the case records can
be called to verify the fact mentioned in the reasons to consider the validity
of the reasons but, certainly, in our view, the case records cannot be looked
at, to supplement the reasons to justify the reopening of the assessment.
25 In view of what is discussed above, when we apply the
touchstone as to whether there was reason to believe that income had
escaped assessment, in our view, it was impossible for any prudent person
to form a reasonable belief that the income had escaped assessment. The
reasons, which have been recorded, could never have led a prudent person
to form an opinion that income had escaped assessment within the meaning
of Section 147 of the Act.
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26 In these circumstances, the petition shall have to be allowed by
setting aside the notice dated 28 th March 2024 issued under Section 148 of
the Act as well as the impugned order dated 29 th September 2015 passed
under Section 148 of the Act, which we hereby do.
27 Rule is made absolute accordingly. There shall be no order as to
costs.
WRIT PETITION NO.261 OF 2016
WITH
WRIT PETITION NO.271 OF 2016
28 In these two petitions also the reasons recorded are identical to
the reasons recorded in Writ Petition No.806 of 2016. Therefore, our
findings above in Writ Petition No.806 of 2016 will squarely apply to these
two petitions as well.
29 Further in Writ Petition No.261 of 2016, where notice under
Section 148 of the Act has been issued after the expiry of four years from
the end of the relevant assessment year and where assessment under
Section 143(3) of the Act had also been completed, the proviso to Section
147 of the Act would apply in as much as reopening of assessment is
permissible only where there has been failure to truly and fully disclose
material facts for the assessment. In the reasons recorded for reopening,
there is not even an allegation that there was failure on the part of the
assessee to truly and fully disclose material facts. On this ground also the
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notice issued and the order rejecting objections have to be quashed and set
aside.
30 Both petitions disposed.
(DR. NEELA GOKHALE, J.) (K. R. SHRIRAM, J.)
Gauri Gaekwad
Signed by: Gauri A. Gaekwad
Designation: PS To Honourable Judge
Date: 07/02/2024 11:15:41
