TMI Blog2009 (5) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... more additions on protective basis. AO made additions towards depreciation and interest on IT refund on substantive basis in the present order and both these additions have been accepted by the assessee as having not been challenged either before the learned CIT(A) or the Tribunal. In this backdrop of facts we have to decide whether the initiation of reassessment proceedings can be held to be valid or not. We find from the reasons recorded by the AO vis-a-vis the additions actually made in the order in support of those reasons. that the amount of income likely to escape assessment is much more than one lakh Rupees. Under these circumstances, we have no hesitation in holding that the case of the assessee falls under cl. (b) of s. 149(1). We, therefore, hold that the notice issued by the AO u/s. 148 is not barred by time in terms of s. 149(1). Having held that the notice was issued within the permissible time, now it remains to be examined as to whether or not the AO had rightly initiated the reassessment proceedings. A mere suspicion of the AO about the escapement of income cannot justify the action under this section. There is no dispute and there cannot be any that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment - When the matter was pending before CIT(A), the AO changed his opinion and came to the conclusion, that the disallowance of advertisement expenditure was not called for in the block assessment proceedings. HELD THAT:- we are satisfied that having made addition in the block assessment, the AO was not justified in forming the belief, either on substantive or protective basis, that the same income has escaped assessment in the instant year. In Wipro Finance Ltd.'s [ 2008 (4) TMI 519 - KARNATAKA HIGH COURT] case there was search action on the assessee. Some income was assessed as undisclosed income for the block period. The AO made addition for the same in regular assessment on protective basis. When the matter came up before the Hon'ble High Court, it was held that the same income which was assessed as the undisclosed income for the block period, could not have been assessed even on protective basis in regular assessments u/s. 143 for those years. In the instant case, we are concerned with the reassessment, in which there are more restraints on the power of the AO. We, therefore, hold that the initiation of reassessment proceedings on this count cannot be upheld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee, which was not accounted for in the books of account. Unless the amount payable to the assessee is determined and that too with the mutual consent, there cannot be any question of relinquishing or not receiving the same. We find that the said judgment in the case of Morvi Industries Ltd. was considered by the Hon'ble Supreme Court in CIT vs. Birla Gwalior (P) Ltd.[ 1973 (4) TMI 2 - SUPREME COURT] in which the assessee gave up commission after the end of the financial year. No due date was fixed for the payment of commission under the agreement. When the AO put to tax the amount of managing commission, the Hon'ble Supreme Court held that the amount receivable could have been ascertained only after the managed company made up its account. It was further laid down that the mere fact that the assessee-company was maintaining its account on the basis of mercantile system could not lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year. We find that there is no material to suggest, even remotely, that any amount more was determined, which the assessee failed to account for. In the absence of determination o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to the reimbursement of the advertisement expenses incurred by it from the company. It was noted from the analysis of the advertisement expenditure that the maximum amount was debited by the assessee in his books of account, whereas JLL had debited only the barest minimum amount. The AO noted in the reasons that this issue was also taken up during the block assessment proceedings and it was found that the assessee was actually incurring huge expenditure on advertisement and publicity and only a part of it was reimbursed by JLL resulting into lower income in the hands of the assessee. During the previous year relevant to the assessment year under consideration, the assessee got a reimbursement of Rs. 55.86 lakhs from the company. The assessee did not furnish the basis of reimbursement of expenses. The AO compared advertisement expenses claimed by the assessee in his personal books of account and JLL. After a detailed analysis, the AO observed that the assessee had debited Rs. 583.71 lakhs as expenditure relatable to JLL whereas only reimbursement to the tune of Rs. 55.86 lakhs was made leaving a balance of Rs. 527.85 lakhs which was not reimbursed. It was held that the advert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sum also with a narration "previous year expenditure debited to P L a/c". Resultantly the total income was computed at Rs. 5.60 crores and odd as against the originally computed income at Rs. 32.36 lakhs. 3. From the copy of Form No. 35, being the appeal memo filed before the learned CIT(A), it transpires that the assessee challenged initiation of reassessment before the learned CIT(A) and also the addition of Rs. 5,27,85,000 made by the AO out of advertisement expenses. However, no ground was taken against the disallowance of addition of depreciation on land and IT refund. The learned CIT(A) upheld the assessment order on the question of legality of the initiation of reassessment proceedings. However, as regards the addition of Rs. 5.27 crores made by the AO towards advertisement expenses, the learned CIT(A) reduced it to Rs. 2,82,53,109 thereby allowing relief of Rs. 2,45,31,891. Both the sides are in appeal against their respective stands. 4. Before us, the learned senior counsel for the assessee assailed the action of the authorities below on the initiation of reassessment proceedings. He stated that the AO had passed block assessment order on 30th Nov., 2002 inter alia m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the same income which was assessed in the block assessment on substantive basis but deleted by the Tribunal. He stated the assailing of the Tribunal's order before the Hon'ble High Court by the Department, implied that the Revenue was contending that the addition made in the block assessment was in order. It was put forth that in such a situation there could not be any 'reason to believe' that income chargeable to tax has escaped assessment for the relevant year. 5. The learned senior Authorised Representative took us through the copy of reasons recorded by the AO for initiating the reassessment proceedings, which are available at p. 1 onwards of the paper book. He stated that the AO has not made any addition in respect of discussion made by him in paras upto serial No. 4. While taking us through para 5 of the reasons, the learned senior Authorised Representative stated that the return of income for asst. yr. 1994-95 was processed under s. 143(1)(a), by which the refund of Rs. 28,045 was determined and issued vide refund order No. 1653487 dt. 21st June, 1996. He submitted that the said refund also included interest allowed to the assessee at Rs. 5,057 which was not offered f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unless the relief granted for the original year was withdrawn. Be submitted that since the depreciation on building for asst. yr. 1990-91 onwards has not been disturbed, the AO was not entitled to disallow the depreciation in the proceedings under s. 147. On a specific query from the Bench, the learned senior Authorised Representative fairly admitted that insofar as the additions on account of depreciation on land amounting to Rs. 2,650 and interest on refund of Rs. 5,057 were concerned, those were not the subject-matter of block assessment. Only the addition on account of advertisement expenditure of Rs. 5.27 crores was the one which was made in the block assessment on substantive basis and in the reassessment on protective basis. 6. The learned senior Authorised Representative further contended that the notice issued under s. 148 was also time-barred as per s. l49(1)(a) in as much as apart from the advertisement expenditure disallowed, the other two items for which addition was made in the present assessment order amounted only to Rs. 7,707, which was less than Rupees one lakh. Going by s. 149(1)(a), the learned senior counsel stated that notice under s. 148 could not have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, viz., depreciation on land and interest on IT refund, the learned Departmental Representative stated that these additions were not made in the block assessment and the assessee had accepted the same and no ground was raised assailing these additions either before the learned CIT(A) or the Tribunal. It was, therefore, contended that the learned CIT(A) was justified in holding that the initiation of reassessment was valid. 8. We have heard the rival submissions in the light of material placed before us and the precedents relied upon. From the facts recorded above it is clear that while finalizing the block assessment, the AO made addition of Rs. 527.85 lakhs towards advertisement expenses, which action was finally reversed by the Tribunal allowing relief to the assessee and the Department is in appeal before the Hon'ble High Court against the order of the Tribunal. The AO initiated the reassessment proceedings even prior to the disposal of appeal by the learned first appellate authority, by recording the reasons that the deduction of Rs. 527.85 lakhs towards advertisement expenditure was not allowable. Apart from that, the reasons for the initiation of reassessment proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of s. 148. Sub-s. (2) of s. 148 clearly stipulates that the AO shall, before issuing any notice under this section, record his reasons for doing so. The relevant provision1whieh was hitherto finding place in s. 147, was shifted as sub-s. (2) of s. 148. The net effect remains the same that the AO is required to record his reasons before issuing any notice for reassessment. To this extent we do not approve the view taken by the learned AO. However, in our considered opinion, these observations of the AO are extraneous in as much as he had, in fact, recorded the reasons before initiating the reassessment and a copy of such reasons was also supplied to the assessee at the request of the latter, as is apparent from the assessment order, which fact has not been denied on behalf of the assessee. 11. A preliminary objection has been raised by the learned senior Authorised Representative about the time limitation. It was stated that on behalf of the assessee that s. 149(1)(a) is applicable in the present ease and as such notice issued under s. 148 after four years from the end of the relevant assessment years was invalid. We are not agreeable with this contention for the obvious reason t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to be seen is the prima facie view of the AO about the amount of likely income escaping assessment at the stage of the issuance of notice under s. 148. Turning to the prevailing factual position we find. from the reasons recorded by the AO vis-a-vis the additions actually made in the order in support of those reasons. that the amount of income likely to escape assessment is much more than one lakh Rupees. Under these circumstances, we have no hesitation in holding that the case of the assessee falls under cl. (b) of s. 149(1). We, therefore, hold that the notice issued by the AO under s. 148 is not barred by time in terms of s. 149(1). 12. Having held that the notice was issued within the permissible time, now it remains to be examined as to whether or not the AO had rightly initiated the reassessment proceedings. Coming to the scope of s. 147 we observe that the legislature has employed the expression "reason to believe" about any income chargeable to tax which has escaped for any assessment year, in order to empower the AO for resorting to the assessment under s. 147, subject to the provisions of ss. 148 to 153. As rightly pointed out by the learned senior Authorised Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comes to his notice after the completion of assessment which belies the assessee's claim on that item. Again it is pertinent to mention that there should be positive application of mind by the AO on a particular item of income or expenditure so as to bar it from inclusion in the reassessment. Where the information was available before the AO in the original assessment but it escaped his attention, then it cannot be said that the said item of income has attained finality so as to merit exclusion in reassessment. Explanation 1 to s. 147 makes the things very clear, which provides that the production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure. When Expln. 2 is read in juxtaposition to Expln. 1 and the main provision of s. 147, it becomes crystal-clear that, subject to other provisions, in a case where the original assessment was framed under s. 143(3) and subsequently it comes to the notice of the AO that still some income chargeable to tax has escaped assessment. he can get the assistance of the provisions of s. 147 provided it does not amount to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offer it for taxation in any year. It is further noted that the AO made additions in respect of interest on refund and depreciation on land in the order under s. 147 and the assessee did not assail them in the appellate proceedings either before the learned CIT(A) or us. It, therefore, shows that the assessee accepted that the additions were, in fact, called for. Now it cannot be allowed to turn around and claim that though the additions were rightly made but the initiation of reassessment proceedings was bad on these two counts also. This contention could have merited consideration if the assessee had challenged these additions also on merits simultaneous with the raising of objection against the initiation of reassessment proceedings on this count. The law does not permit a person to both approbate and reprobate. 15. Hardly any authority needs to be cited for the proposition that if the notice under s. 148 is sustainable on any of the reasons taken by the AO, the initiation of reassessment cannot be declared as invalid. Since the two additions/disallowances qua the depreciation on land the interest on IT refund, have been accepted by the assessee, we, therefore, hold that the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid trade mark without any prior permission of JLL as per cl. 13 of the agreement. In lieu of making available the trade mark to JLL, the assessee was to receive royalty as per cl. 16 of the agreement. Further, according to cl. 19 the assessee was to ensure continuance of sufficient advertisement of the brand and trademark. As per cl. 16(iii) JLL was to reimburse to the assessee on demand the expenses with reference to the market covered by it and the said sum was to be determined from time to time with mutual deliberation and consent. It is an admitted position that apart from making available the trade mark to JLL, the assessee, in his individual capacity, also used the said trade mark. Charts have been prepared at p. 12 of the assessment order showing that the assessee made sales in the States of Kerala/Tamil Nadu in his individual capacity at Rs. 2,369.71 lakhs in the year in question and in the other areas at Rs. 480.83 lakhs. Thus, the total sales effected by the assessee in this year amounted to Rs. 2,850.54 lakhs. On the other hand, JLL effected sales in the States of Kerala/Tamil Nadu at Rs. 406.25 lakhs by using the trademark "Ujala" and in other areas at Rs. 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called for in the block assessment proceedings. The learned Departmental Representative has fairly conceded that the Tribunal deleted the said addition from the block assessment and the Department has carried the matter before the Hon'ble High Court by assailing that the addition was to be made in the block assessment. 18. Under these circumstances, it has to be determined whether the action of the AO was justified in reopening the assessment on the ground that the advertisement expenditure was liable to be disallowed to the tune of Rs. 527.85 lakhs. We have reproduced the relevant part of s. 147 in an earlier para. From the language of this provision it can be seen that the reopening can be done where the AO has reason to believe that any income chargeable to tax has "escaped assessment" for any assessment year. Thus, the essence of this provision is to arrest the income that has escaped assessment and then bring to tax. In other words, the AO should have belief about any income escaping assessment. An item of income is said to have escaped assessment if it is not charged to tax. If on the other hand an income has already been charged to tax in the hands of the same assessee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est of the Revenue. Though from the reasons recorded by the AO, it comes up from para 9.2 that he had taken the steps for including this amount in the reassessment with a view to protect the interest of Revenue, but he had not specifically spelt out his mind that the addition was to be made on protective basis. It is another matter that while passing the order under s. 143(3) r/w s. 147 addition of Rs. 527.85 lakhs was made on protective basis. Be that as it may, we shall proceed to decide the matter with the presumption that the AO reopened the original assessment made under s. 143(3) on this count for the purpose of making the disallowance of advertisement expenses on protective basis. 20. We have aforenoted that the fundamental nature of the proceedings under s. 147 is to charge to tax an item of income which has escaped assessment. When regular assessment is made and later on it comes to the notice of the AO that any income chargeable to tax has escaped assessment, he can take recourse to these provisions for taxing such income on substantive basis. As the very foundation of this provision is to charge to tax some income which has escaped assessment, it is sine qua non that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons only. It may be possible that the AO may be sure of only one person having earned an income, but he may be uncertain of the year in which the income was earned, that is year one or year two. In such a case, he can tax such income in both the years, of course subject to the other provisions, in one year on substantive basis and in the other year on the protective basis. 22. Coming back to our point we have to examine whether protective assessment/addition is possible under s. 147 in respect of the same person and for the same period. When a regular assessment is made and later on it comes to the notice of the AO that some income chargeable to tax has escaped assessment, he can resort to these provisions for reassessment. But if, as is the case under consideration, after the passing of the regular assessment order, the AO has passed a block assessment order under s. 158BC pursuant to search and seizure proceedings under s. 132 and included one income in the block assessment, is he empowered to include the same income, on protective basis, in the reassessment of the original regular assessment for the year, which is included in the block period? Before answering this question, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition will get converted into substantive addition in the reassessment. That will also run contrary to the format of reassessment, being to tax an income which has escaped assessment. In that case again it will tantamount to reopening assessment on the basis of an item of income or, disallowance, which has already been made in block assessment of the assessee, thereby leaving no income escaping assessment. Under these circumstances we are satisfied that having made addition of Rs. 527.85 lakhs in the block assessment, the AO was not justified in forming the belief, either on substantive or protective basis, that the same income has escaped assessment in the instant year. In Wipro Finance Ltd.'s case there was search action on the assessee. Some income was assessed as undisclosed income for the block period. The AO made addition for the same in regular assessment on protective basis. When the matter came up before the Hon'ble High Court, it was held that the same income which was assessed as the undisclosed income for the block period, could not have been assessed even on protective basis in regular assessments under s. 143 for those years. In the instant case, we are concerned wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be said that it had escaped assessment. Adverting to the facts of the instant case, we find that when the AO included a sum of Rs. 527.85 lakhs in the undisclosed income of the assessee in the block assessment, it cannot be said that the same income escaped assessment for the purposes of s. 147. The other necessary ingredient, for the second category of the items of income which can be brought to tax, is that they came to the notice of the AO subsequently in the course of proceedings under this section. In other words, if an item of income is constituting one of the reasons for the initiation of the reassessment proceedings, that cannot be said to have come to his notice subsequently in the course of the proceedings under this section. We notice from the copy of the reasons that the disallowance of advertisement expenses was very much in the notice of the AO when he initiated reassessment proceedings. A substantial part of the reasons for the belief that the income has escaped assessment has been devoted to the discussion on this aspect of the matter. Thus, it cannot be said that this item of disallowance came to the notice of the AO subsequently in the course of proceedings u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee contended that no addition at all was required to be made because the expenditure was incurred wholly and exclusively for the purpose of assessee's business. In the opposition the learned Departmental Representative, in support of his appeal, contended that the AO was reasonable in making the apportionment of the advertisement expenditure towards turnover effected by the assessee and JLL area-wise. He, therefore, prayed that the relief allowed by the learned CIT(A) be withdrawn and the assessment order be restored. 27. We observe from the assessment order that the protective disallowance under s. 37(1) of the Act has been made for Rs. 527.85 lakhs primarily for the reason that the assessee was not adequately reimbursed by JLL and secondly this expenditure was not related wholly and exclusively for the business activities of the assessee. Thus, this disallowance has two facades. First is the allowability of the expenditure incurred by the assessee on advertisement and second is the getting of the reimbursement from JLL. 28. The logic behind the action of the authorities below is that the advertisement expenditure, which is proportional to the sales of JLL, has been incurred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd exclusively for the purpose of assessee's business. 29. The learned Departmental Representative contended that the addition was rightly made for the reason that JLL had also taken advantage of the advertisement expenditure incurred by the assessee and hence it cannot be said that the advertisement expenditure was wholly and exclusively for the purpose of assessee's business. We are not convinced with the submission made on behalf of the Revenue for the reason that the advertisement expenditure was, in fact, incurred by the assessee wholly and exclusively for his business. The genuineness of this expenditure has not been doubted by the Revenue authorities. Further, it is not the case of the AO that the agreement with JLL was sham or bogus. Their objection to the allowability in entirety is that JLL had also obtained advantage out of this expenditure and to that extent the character of wholly and exclusively is lost. In our considered opinion so long as the expenditure, is incurred wholly and exclusively for the purpose of business, nothing should come in the way of allowing deduction even if some benefit from the expenditure has flown to anybody else. Our view is fortified by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ested in the assessee. There may be several factors, depending upon the situation to situation, for determining that when the right to receive income vests in the assessee, In order to find out the amount and the time at which the assessee acquired the right to such reimbursement of advertisement expenses, it is relevant to look in to the relevant clauses of the agreement. The authorities below have heavily relied on cl. 16 of the agreement between the assessee and JLL for coming to the conclusion that the assessee was entitled to receive the reimbursement of expenses and the income had resulted. The relevant cl. of the agreement is reproduced as under: "16. (i) The users shall pay to the proprietor in respect of this agreement technical know-how/royalty of 25 paise per bottle of Ujala 75 ml. and proportionately higher or lower sum for various volumes of the product sold during each financial year commencing from the date of this agreement. (ii) The users shall pay to the proprietor such advance as and when demanded by the letter which in any case shall not exceed 3 times of the technical know-how/royalty fee paid during the previous financial year in which the demand for advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Hon'ble Supreme Court in CIT vs. Birla Gwalior (P) Ltd. 1973 CTR (SC) 349 : (1973) 89 ITR 266 (SC) in which the assessee gave up commission after the end of the financial year. No due date was fixed for the payment of commission under the agreement. When the AO put to tax the amount of managing commission, the Hon'ble Supreme Court held that the amount receivable could have been ascertained only after the managed company made up its account. It was further laid down that the mere fact that the assessee-company was maintaining its account on the basis of mercantile system could not lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year. Coming back to the facts of the instant case we find that there is no material to suggest, even remotely, that any amount more than Rs. 55.86 lakhs was determined, which the assessee failed to account for. In the absence of determination of the alleged amount reimbursable by JLL to the assessee, no hypothetical exercise is permissible to hold that the amount of Rs. 527.85 lakhs accrued to the assessee as his income, which was not accounted for. We are of the considered opinion that the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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