9911796707
TMI Blog2009 (5) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... . After filing the return, the assessee requested for a copy of the reasons recorded for the reopening of the assessment and the same was provided to the assessee. The assessee objected to the initiation of reassessment vide its letter dt. 7th Nov., 2003 stating that all the relevant information and documents were filed with the AO during the course of original assessment proceedings in which an addition of Rs. 10,84,523 was made. It was claimed that there was no failure on the part of the assessee to disclose all the relevant facts and hence the reassessment be not made. Considering the provisions of s. 147 and other relevant sections, the AO came to the conclusion that his action was valid. One of the issues which weighed heavily with the AO for issuing notice under s. 148 was that the assessee had claimed expenditure on advertisement and publicity to the tune of Rs. 99.46 lakhs and as per the agreement entered into between the assessee and Jyothy Laboratories Ltd. (hereinafter referred to as "JLL"), the assessee was entitled 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the assessment proceedings, the assessee was called upon to file the bifurcation of the land cost and building cost which was not furnished. The assessee placed reliance on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Alps Theatre (1967) 65 ITR 377 (SC) as per which the assessee was entitled to depreciation on building and land appurtenant to it. The AO noted that the assessee had not furnished the area of land which was purchased in 1990 and the area on which building was constructed. He, therefore, estimated the depreciation claimed on the excess land held by the assessee at 50 per cent of the regular rate of depreciation of 10 per cent. Disallowance of Rs. 2,650 was made on this count and added to the total income. Another reason recorded by the AO for reassessment, was that a sum of Rs. 5,057 was the amount of interest on refund received by the assessee from the IT Department on 21st June, 1996, which was not offered for taxation in the return filed by the assessee. The AO made addition for this 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 ori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in the reassessment proceedings. He referred to the judgment of the Hon'ble Bombay High Court in the case of CIT vs. H.N. Shindore (1978) 113 ITR 679 (Bom) which in his opinion was relevant to the issue. He also cited another judgment of the Hon'ble Bombay High Court in the case of Smt. Mira Ananta Naik & Ors. vs. Dy. CIT (Inv.) (2008) 15 DTR (Bom) 8 to contend that where a block assessment was made pursuant to the search and seizure proceedings which was quashed by the Tribunal, the notice issued under s. 148 in respect of the same income was not valid. He also pressed into service the case of CIT vs. Wipro Finance Ltd. (2008) 10 DTR (Kar) 281 for contending that the income which was assessed as undisclosed income for the block period could not be assessed even on protective basis in the regular assessment under s. 143 for those years. By the reason of these judicial precedents, the learned senior Authorised Representative contended that the AO was not justified in his action in issuing noting under s. 148 in respect 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 bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gregate of the WDV of all the assets falling within the block of assets at the beginning of the previous year commencing on 1st April, 1988 and as adjusted by the increase in the actual cost of any assets falling within the block acquired during the previous year and as reduced inter alia by the amount of depreciation actually allowed on year-to-year basis. He stated that in the scheme of block of assets, once the WDV of a particular block of assets was determined, no chance could be made in the subsequent year unless the figure of the first year was altered. While making reference to the judgment of the Hon'ble jurisdictional High Court in the case of CIT vs. Paul Brothers (1995) 216 ITR 548 (Bom), the learned senior Authorised Representative contended that in this case deduction was allowed under s. 80HH in an earlier year and when the Revenue sought to reject the claim of deduction in subsequent year, the Hon'ble High Court held that there was no provision for withdrawal of special deduction for the subsequent year 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 disturb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reassessment proceedings that the assessee had e]aimed deduction for advertisement expenses which was not available to him as per law and hence the learned CIT(A) was justified in holding that the initiation of reassessment was valid. Referring to the interest on refund amounting to Rs. 5,057 which also led to the initiation of reassessment proceedings, the learned Departmental Representative stated that the said amount was chargeable to tax when it was actually granted to the assessee and that event took place on 21st June, 1996 when the cheque was issued towards interest on refund. He also supported the action of the AO in initiating the reassessment proceedings on the question of depreciation on land amounting to Rs. 2,650 which was wrongly claimed by the assessee. It was stated that the AO had made three additions in total, out of which t he assessee only challenged the first addition, being the disallowance of advertisement expenditure of Rs. 527.85 lakhs before the learned CIT(A). As regards the other two additions, viz., depreciation on land and interest on IT refund, the learned Departmental Representative stated that these additions were not made in the block assessment an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of ss. 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereinafter in this section and in ss. 148 to 153 referred to as the relevant assessment year)." After this main provision of s. 147, there is a proviso. Then there are two Explanations, to which we shall refer at the appropriate stage. 10. The learned senior Authorised Representative has objected to the observations of the AO at p. 1 of the assessment order to the effect that the provisions of s. 147 have undergone change w.e.f. 1st April, 1989 and after the amendment, the requirement of recording the reasons in writing prior to the initiation of reassessment was dispensed with. In our considered opinion, the AO has not properly gone through the text 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 provision1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is excluded, then the amount is less than Rs. 1 lakh. It is beyond our comprehension as to why the first addition of Rs. 527.85 lakhs is liable to go out of the consideration zone in determining the amount of income likely to escape assessment. Here it is relevant to note that the time-limit provided under s. 149 is for issuance of notice under s. 148. At that stage, the view of the AO about the amount of income escaping assessment is to be considered. Further, the crucial words used in this provision are "likely to amount to". These words are clear indicator of the prima facie view of the AO about the amount of income escaping assessment. At the stage of the issuance of notice, the AO cannot determine, with exactitude, the amount of the income that will finally result as having escaped assessment. It is only when the order is passed that the precise amount of income that escaped assessment comes to the surface. So in order to determine whether a case falls under cl. (a) or (b) of s. 149(1), what is relevant 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 preva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the situation in which the 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. Clause (c), which is relevant for our purpose, deals with a situation in which an assessment has been made but income chargeable to tax has been under-assessed or such income has been assessed at too low a rate. Thus, it is seen that even if original assessment was finalized under s. 143(3) but later on it transpires to the AO that some income chargeable to tax has escaped assessment, he can take recourse to the provisions of s. 147. Here again there is a rider that the belief of the AO about the escapement of income should not be based on the change of his opinion. In other words if while finalizing the original assessment he had applied his mind to a particular item of income or expenditure and accepted the claim of the assessee positively, then he cannot take the assistance of s. 147 for such items unless something new 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 applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had disclosed all the relevant facts fully and truly and hence the notice issued after four years from the end of the relevant assessment year be held to be invalid. We are not convinced with this proposition for the reason that the assessee was allowed interest on the IT refund in this year which was not offered for taxation by the assessee. To that extent, it is clear that the assessee failed to disclose fully and truly all material facts necessary for assessment. On the argument of the learned senior Authorised Representative that the assessee was following mercantile system of accounting and hence the interest was taxable in the earlier year, a pertinent query was raised from the Bench if the assessee had offered this interest for taxation in any year, either preceding or current or the succeeding. The learned senior Authorised Representative replied it in the negative. Thus, it is clear that the assessee did earn the interest income on IT refund, which is otherwise chargeable to tax but failed to 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenses was towards JLL, from whom it was to get the reimbursement. In his opinion the apportionment of such expenses between the assessee and JLL was called for. At this stage it will be relevant to note that the assessee is proprietor of trade mark "Ujala" in respect of liquid blue/liquid fabric whitener. By virtue of agreement entered into by the assessee with JLL on 23rd Dec., 1994 the assessee granted to the user (that is the JLL) a non-exclusive licence to use the said trade mark "Ujala". This licence was initially granted for a period of 10 years which could be renewed as per the terms mutually agreed upon between the parties. The users were permitted to sell the goods bearing the said trade mark "Ujala" in whole of the Indian Union as also to export such goods as per the terms of cl. 10 of the agreement. This use of the trade mark was permitted to JLL on non-exclusive basis as the assessee was also entitled to use this trade mark at his own and/or permit any other manufacturer or trader to use 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken up for consideration for reassessment not as per the AO's belief about the escapement of income but as noted by himself that "the assessee has consistently been of the opinion that such disallowance is not warranted in the block assessment being not within the purview of Chapter XIV-B of the IT Act, 1961". Again in para 9.2 of the reasons, the AO has noted that the assessee was consistently objecting to the addition made in the block assessment order and it was the opinion of the assessee that the same was not covered under Chapter XIV-B of the Act. From the above discussion it comes to the fore that the AO, during the block assessment proceedings, formed his opinion that addition of Rs. 527.85 lakhs was warranted as undisclosed income in the block assessment and he actually made such addition. When the matter was pending before the learned CIT(A), the AO changed his opinion and carne to the conclusion, on the strength of the assessee's view that the disallowance of advertisement expenditure was not 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income was assessed and taxed after it was brought to the notice of the AO. Merely because the block assessment was not upheld by the authorities under the IT Act, it cannot be reason enough in this case to invoke s. 147 of the same. The income has not escaped assessment in the admitted factual position'. 19. From here it follows that there cannot be any initiation of reassessment proceedings on the basis of an item of income or disallowance which has been made in another proceedings of the same assessee for the same year. The learned Departmental Representative pleaded that there was one crucial difference in the present case inasmuch as the initiation of the reassessment proceedings on this issue was done by the AO by way of abundant caution as it was a case of protective addition and not substantive addition. In simple words his view is that there cannot be any embargo on the power of the AO on initiating reassessment proceedings on a protective basis, because that is simply to protect the interest 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it appears that the income may have been received either by A or B or by both together, it would be open to the relevant IT authorities to determine the said question by taking appropriate proceedings both against A and B. That being so, the appellant would not be justified in resisting the enquiry which is proposed to be held by the respondent No. 1 in pursuance of the impugned notice issued by him against the appellant. From the above observations of their Lordships of the Hon'ble Supreme Court, it is apparent that where the AO is not fully satisfied about the correct person to be taxed in respect of an income, he is competent to proceed against the other possible person(s) by way of protective measure, who in his opinion, might have earned that income. Thus, it is an alternative assessment of another person subject to the finality of the decision in whose hands the assessment is substantively made. In our opinion, the scope of the protective assessment cannot be cabined in case of two or more persons 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in whose hands the AO prima facie holds the opinion that the income is rightly taxable. Having done so and with a view to protect the interest of the Revenue, if the AO is not sure that the person in whose hands he had made the substantive addition rightly, he embarks upon the protective assessment. Thus, the protective assessment is basically based on the doubt of the AO as distinct from his belief which is there is the substantive assessment. Obviously there is no place for 'doubt' in the scheme of reassessment, as it has to be belief of the AO about the escapement of income, which is the foundation for assessment or reassessment under s. 147. Even if for a moment we agree with the learned Departmental Representative that the protective addition is different from substantive addition and hence the reassessment proceedings be upheld, we find that ultimately the same conclusion will follow if the substantive addition is struck down at a place where it was made. In such a scenario the protective addition 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of additions are any other income chargeable to tax which has escaped assessment "and which comes to his notice subsequently in the course of proceedings under this section". So the second type of items of income always emerge posterior to the issuance of notice under s. 148 and come to the notice of the AO in the course of proceedings under s. 147. In order to be covered in the second category/two conditions are required to be cumulatively satisfied: (a) any other income chargeable to tax which has escaped assessment; and (b) which comes to his notice subsequently in the course of proceedings under this section. Therefore, it can be seen that the purview of later part of s. 147, being any item other than those in respect of which the AO had reason to believe that it had escaped assessment, should be such which have not only escaped assessment but which come to his notice subsequently in the course of proceedings under this section. If a particular income has already been charged to tax, it cannot 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a sum of Rs. 583.71 was incurred by the assessee on behalf of JLL, which should have been reimbursed in full. As the assessee got reimbursement of Rs. 55.86 lakhs only, the AO made addition for the balance amount of Rs. 527.85 lakhs by holding it as amount relatable to JLL which was not reimbursed and which was not incurred wholly and exclusively for the business activities of the assessee. When the assessee challenged the addition before the learned CIT(A), the learned first appellate authority came to hold that the AO was justified in making the addition in principle, but the apportionment of the expenditure towards the assessee's business and JLL was not appropriately done by the AO. In his opinion, the apportionment should have been done on the basis of the total sales as a whole independent of particular territory/States. In this way he reduced the addition to Rs. 2.82 crores. Both the sides are in appeal against their respective stands. 26. The learned senior counsel for the assessee 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure on the advertisement, as per the terms of the agreement, the user i.e., JLL would have disputed the payment of royalty. Further, the rate of royalty is fixed on the basis of units sold. The more and more advertisement results in more and more sales and the resultant higher royalty to the assessee. Thus, it can be seen that the earning of the business income in the shape of royalty was dependent upon the incurring of the advertisement expenditure. We fail to see as to how the part of advertisement expenditure, which in the opinion of the authorities below relates to the sales made by JLL, can be held as incurred not wholly and exclusively for business purpose. It is not possible to, detach the advertisement expenditure from the royalty income as the latter depends mainly upon the former and the terms of the royalty agreement with JLL cast obligation on the assessee to advertise the brand. We, therefore, hold that the entire advertisement expenditure incurred by the assessee was wholly and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , profits or gains should have become vested in him though its valuation may have been postponed. The learned Departmental Representative cited the judgment of the Hon'ble Supreme Court in the case of Morvi Industries Ltd. vs. CIT (1974) 1974 CTR (SC) (SC) 149 : (1971) 82 ITR 835 (SC) to contend that the income had accrued to the assessee when he incurred the advertisement expenditure on behalf of JLL. Not receiving the requisite share from JLL, in the opinion of the learned Departmental Representative, resulted into unilateral relinquishment of income after becoming due which could not escape the liability to tax. We have absolutely no doubt in our mind that if a particular income has accrued to the assessee, that cannot go out of the purview of tax net, simply because of the reason that it was subsequently relinquished. It is the time of accrual of income, which attracts taxability and not the later events. Accrual of income takes place when the right to receive the income is finally vested 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual consent and hot prior to that. The AO has referred to the amount actually received by the assessee towards reimbursement of advertisement expenses at Rs. 55.86 lakhs. Then he proceeded to work out the amount on a proportionate basis which, in his opinion, was incurred by the assessee towards advertisement expenses as relatable to the "Ujala" trademark. It is not the case of the AO that the sum of Rs. 583.71 lakhs was actually determined to be payable by both the sides and had become payable 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. In our considered opinion, the judgment relied upon by the learned Departmental Representative in the case of Morvi Industries Ltd. does not advance the case of the Revenue. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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