2024 (2) TMI 466 - HC - Income Tax

Reopening of assessment - reason to believe - disallowance of expenditure on account of advertisement, sales promotion, product display posters, etc. as it did not pertain to the business of assessee and, therefore, not allowable u/s 37 - HELD THAT - The only basis to disallow expenditure 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 2010 (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 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. 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. 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. Thus 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. Decided in favour of assessee.

Summary

Issues Involved
1. Validity of reopening assessment under Section 148 of the Income Tax Act, 1961.
2. Allowability of sales promotion expenses under Section 37(1) of the Income Tax Act, 1961.
3. Assessment of the nexus between sales promotion expenses and the business of the petitioner.
4. Impact of the Settlement Commission's order on the reassessment proceedings.

Summary of Judgment

Issue 1: Validity of Reopening Assessment under Section 148 of the Income Tax Act, 1961
The petitioner challenged the notice dated 28th March 2014 issued under Section 148 of the Income Tax Act, 1961, to reopen the assessment for the Assessment Year 2007-2008. The court found that the reasons recorded by the Assessing Officer did not provide a reasonable basis to believe that income chargeable to tax had escaped assessment. The court emphasized that the sufficiency of evidence is not open to scrutiny, but the existence of belief is a sine qua non for a valid exercise of power. The court concluded that the reasons 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.

Issue 2: Allowability of Sales Promotion Expenses under Section 37(1) of the Income Tax Act, 1961
The court examined whether the sales promotion expenses incurred by the petitioner could be disallowed under Section 37(1) of the Act. The court held that the expenses incurred for promoting the business and earning profits are allowable as deductions, even if they also benefit a third party. The court referred to the Supreme Court judgment in Sassoon J. David and Co. P. Ltd., which stated that 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 if it satisfies the tests laid down by law.

Issue 3: Assessment of the Nexus between Sales Promotion Expenses and the Business of the Petitioner
The court found that there was a direct nexus between the expenditure incurred on advertisement and sales promotion and the business of the petitioner. The court noted that the petitioner was engaged in the business of importing and trading in foreign-made liquors, and the sales promotion expenses were incurred for the purpose of this business. The court rejected the argument that the expenses were not related to the business of the petitioner merely because they were incurred at the direction of another company.

Issue 4: Impact of the Settlement Commission's Order on the Reassessment Proceedings
The court observed that the Settlement Commission's order, which revalued the purchase price of the goods to determine the customs duty, could not lead to the conclusion that the sales promotion expenses were not incurred for the purpose of the business of the petitioner. The court held that the expenses incurred for sales promotion were allowable as deductions under Section 37(1) of the Act, irrespective of the Settlement Commission's findings.

Conclusion
The court allowed the petitions, setting aside the notices issued under Section 148 of the Act and the impugned orders rejecting the objections of the petitioner. The court held that there was no basis for the Assessing Officer to form a belief that income chargeable to tax had escaped assessment and that the sales promotion expenses were allowable as deductions under Section 37(1) of the Act.