2009 (5) TMI 121 - AT - Income Tax

Revenue's Appeal Dismissed; Assessee's Appeal Partly Allowed: Reassessment Upheld, Some Disallowances Deleted, Securing Business Expense Deductions

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal. It upheld the initiation of reassessment proceedings, the ... Validity of initiation of reassessment - block assessment - addition on advertisement expenses - notice issued u/s. 148 time barred - Whether protective assessment/addition is possible u/s. 147 - CIT(A) upheld the assessment order on the question of legality of the initiation of reassessment proceedings - However, as regards the addition made by the AO towards advertisement expenses, CIT(A) reduced it thereby allowing relief. HELD THAT:- Here it is pertinent to mention that the AO had not passed the present order on protective basis. Rather the order is on substantive basis except for the addition, which has been made on protective basis. Insofar as the initiation of the reassessment proceedings are concerned, which is the subject-matter of the instant adjudication, we find that there is a lot of difference in passing the order on protective basis and passing the order on substantive basis but making one or 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 AO cannot reopen the assessment at his whims and fancies. There must be something positive to indicate that the income chargeable to tax has escaped assessment. We find that the AO had inter alia referred to the disallowable depreciation wrongly claimed by the assessee on land along with the assessee not offering interest on IT refund for taxation. It has not been demonstrated that the AO applied his mind to these two items in the course of original assessment u/s. 143(3). 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 u/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. Hardly any authority needs to be cited for the proposition that if the notice u/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 initiation of reassessment proceedings is valid. The ground raised by the assessee in this behalf is dismissed. Sustenance of disallowance on advertisement expenses - addition made by the AO in the block assessment - Whether the action of AO was justified in reopening the assessment on the ground that the advertisement expenditure was liable to be disallowed - CIT(A) decided the appeal against the block assessment and deleted the addition. Thus, it is seen that the AO formed his opinion about the alleged escapement of income before passing of the appeal order by CIT(A) against the block assessment - 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. 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 under this section. It is, therefore, held that both the conditions constituting the basis for roping in 'any other income' in the assessment u/s. 147, are lacking insofar as the addition is concerned. Thus, the view point of the ld DR for the sustenance of disallowance on this view of the matter, is sans merit. We, therefore, hold that the disallowance was neither could have constituted the reasons for initiating the reassessment, nor have otherwise qualified for consideration in the reassessment. We observe from the assessment order that the protective disallowance u/s. 37(1) has been made 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. 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 the judgment of the Hon'ble Supreme Court in Sassoon J. David & Co. (P) Ltd. vs. CIT [1979 (5) TMI 3 - SUPREME COURT]. We find that no part of the advertisement expenditure incurred by the assessee can be related to the non-business purpose of the assessee. Under these circumstances, we are of the considered opinion that the entire advertisement expenditure incurred by the assessee was 'wholly and exclusively' for the purpose of assessee's business. Entitled to reimbursement of advertisement expenses from JLL and to the extent of the non-reimbursement - It is not the case of the AO that the sum 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. 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 of the alleged amount reimbursable by JLL to the assessee, no hypothetical exercise is permissible to hold that the amount accrued to the assessee as his income, which was not accounted for. We are of the considered opinion that CIT(A) erred in sustaining the partial addition. We, therefore, order for the deletion of this addition. In the result, the appeal of the assessee is partly allowed and that of the Revenue is dismissed. Issues Involved:1. Initiation of reassessment proceedings.2. Disallowance of advertisement expenses.3. Disallowance of depreciation on land.4. Taxation of interest on IT refund.Detailed Analysis:1. Initiation of reassessment proceedings:The assessee challenged the initiation of reassessment proceedings, arguing that all relevant information was provided during the original assessment, and there was no failure to disclose material facts. The AO initiated reassessment based on several reasons, including the disallowance of advertisement expenses, depreciation on land, and interest on IT refund. The Tribunal upheld the initiation of reassessment, noting that the AO had valid reasons to believe that income had escaped assessment. The Tribunal also clarified that the notice under s. 148 was issued within the permissible time limit and that the AO had recorded reasons before issuing the notice, as required by law.2. Disallowance of advertisement expenses:The AO disallowed Rs. 527.85 lakhs of advertisement expenses on a protective basis, arguing that the expenses were not wholly and exclusively for the business activities of the assessee. The CIT(A) reduced the disallowance to Rs. 2.82 crores. The Tribunal held that the entire advertisement expenditure was incurred wholly and exclusively for the purpose of the assessee's business. The Tribunal noted that the assessee was obligated to incur advertisement expenses as per the agreement with JLL, and the expenditure was necessary for earning royalty income. The Tribunal also held that the AO was not justified in forming the belief that the same income had escaped assessment, as the addition was already made in the block assessment.3. Disallowance of depreciation on land:The AO disallowed Rs. 2,650 of depreciation on land, arguing that the assessee had claimed depreciation on the composite cost of land and building, which was not permissible. The Tribunal upheld the disallowance, noting that the assessee had not provided the necessary bifurcation of land and building costs. The Tribunal also noted that the assessee had accepted the disallowance and had not challenged it in the appellate proceedings.4. Taxation of interest on IT refund:The AO added Rs. 5,057 as interest on IT refund, which was not offered for taxation by the assessee. The Tribunal upheld the addition, noting that the interest income had accrued to the assessee and was chargeable to tax. The Tribunal also noted that the assessee had not offered the interest for taxation in any year, either preceding or current or succeeding, and had accepted the addition in the appellate proceedings.Conclusion:The Tribunal dismissed the appeal of the Revenue and partly allowed the appeal of the assessee. The Tribunal upheld the initiation of reassessment proceedings and the disallowance of depreciation on land and interest on IT refund. However, the Tribunal deleted the disallowance of advertisement expenses, holding that the entire expenditure was incurred wholly and exclusively for the purpose of the assessee's business.