TMI Blog2024 (2) TMI 466X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 (2) TMI 271 - BOMBAY HIGH COURT] , 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 AO 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, AO 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. Apex Court in Sassoon J. David and Co. P. Ltd. [ 1979 (5) TMI 3 - SUPREME COURT] held that ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 23rd February 2008. Thereafter, petitioner received a notice dated 28th 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. Petitioner was also provided with reason to believe. Petitioner, by a letter d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese 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 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, 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 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 pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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. Income Tax Appeal No.2057 of 2013 dated 16.11.2015 (ii) The Commissioner of Income Tax V/s. M/s. Star India P. Ltd. Income Tax Appeal No. 165 of 2009 dated 24.03.2009 (iii) The Commissioner of Income Tax 11 V/s. M/s. Star India (P) Ltd. Special Leave Petition (Civil) No. 14850 of 2010 dated 16.2.2022 (iv) Commissioner of Income Tax V/s. N.G.C. Network (India) P. Ltd. (2014) 368 ITR 738 (Bom) (v) Sassoon J. David and Co. P. Ltd. V/s. Commissioner of Income Tax, Bombay (1979) 118 ITR 261 (SC) (vi) Prashant S. Joshi Anr. V/s. Income Tax Officer Anr. (2010) 324 ITR 154 (Bom) (vii) Neetu M. Chandaliya V/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med the requisite belief ( Income Tax Officer V/s. Selected Dalurband Coal Co. Pvt. Ltd. (1996) 217 ITR 597 (SC) ); (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 Mandalia (2022) 140 taxmann.com 282 (SC)) . In Maddi Venkataraman and Co. (P.) Ltd. V/s. Commissioner of Income Tax (1998) 229 ITR 534 (SC), the Apex Court held that the assessee 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 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 assessee 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in the aggregate of Rs. 58.42 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. J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 had incurred expenses t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 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 question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss was made on 31st 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the process of seeking the approval as well as the approval which is based on the reasons would be rendered invalid and otiose. 22. Further, the Hon'ble Apex Court in the case of GKN Driveshafts (India) Ltd. V/s. Income Tax Officer 259 ITR 19 (SC) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 26. In these circumstances, the petition shall have to be allowed by setting aside the notice dated 28th March 2024 issued under Section 148 of the Act as well as the impugned order dated 29th Sept ..... X X X X Extracts X X X X X X X X Extracts X X X X
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