2014 (11) TMI 851 - HC - Income Tax

Proceedings u/s 153C restriction on allowance of deduction of expenditure towards advertisement and brand building expenses - Held that - The Tribunal noticed that revenue has not been able to substantiate the findings of the AO - none of the documents contained any incriminating evidence/material the AO has not observed or held that the expenditure was not incurred by the assessee - It has been accepted that the expenditure in fact was incurred - the expenditure incurred on advertisement/brand building was in respect of Joie Agarbatti and incense sticks - The expenditure was not incurred for brand building/advertisement of tobacco products etc., in respect of which royalty payments were received - Reasonableness and whether the assessee was wise and prudent in incurring the expenditure, is not within the domain of examination by the assessing officer, unless permitted and allowed under the statute. Expenses can be disallowed u/s 37(1) of the Act, if it is held that it was not wholly and exclusively for business and not by adopting subjective standard of reasonableness - Section 40A(2) of the Act has not been invoked and there is no provision which stipulates that advertisement and brand building expenses could be restricted or partly allowed there was no need to examine the question as to whether any document belonging to the assessee was found during the course of search and whether Section 153C of the Act was rightly invoked Decided against revenue.

Summary

Issues involved:
1. Assessment under Section 153C of the Income Tax Act, 1961 for the assessment years 2003-04, 2004-05, and 2005-06.
2. Disallowance of expenditure on advertisement and brand building.
3. Interpretation of statutory provisions regarding disallowance of expenditure.
4. Examination of findings by the Commissioner of Income Tax (Appeals) and the Tribunal.

Analysis:
1. The judgment pertains to an individual assessed under Section 153C of the Income Tax Act, 1961, following search and seizure operations on a related group. The respondent was not directly searched but was included based on a satisfaction note. The Assessing Officer initiated proceedings under Section 153C, focusing on royalty receipts from agreements with specific companies for the assessment years in question.

2. The crux of the issue revolved around the disallowance of a significant portion of the expenditure incurred on advertisement and brand building by the respondent. The Assessing Officer contended that the expenditure was unjustified and inflated profits of other companies, leading to a 99% disallowance. The respondent argued that the expenditure was genuine and related to sales promotion activities for specific products, not tobacco items covered by the agreements in question.

3. The Commissioner of Income Tax (Appeals) analyzed the matter extensively and concluded that the Assessing Officer's presumption was incorrect. The Commissioner found no evidence to substantiate the disallowance and directed the deletion of the amount disallowed, emphasizing the lack of a trade mark or copyright agreement for the specific product in question.

4. The Tribunal upheld the Commissioner's findings, noting the absence of incriminating evidence and lack of substantiation by the Departmental Representative. The High Court concurred with the lower authorities, emphasizing that the Assessing Officer could not question the reasonableness of expenditure unless permitted by statute. The Court highlighted the statutory provisions governing expenditure disallowance and the importance of factual correctness in assessment proceedings.

5. Ultimately, the High Court dismissed the appeals, citing the factual inaccuracies in the Assessing Officer's findings and the acceptance of the Commissioner's conclusions by the Tribunal. The Court refrained from delving into additional issues related to the search operation and statutory amendments, leaving them open for future consideration in suitable cases.