2025 (4) TMI 329 - HC - Income Tax

Advertisement expenditure through MRF Pace Foundation allowed as business expense, not charity donation

M/s. MRF Ltd. Versus The Deputy Commissioner of Income tax, Large Tax Payer Unit, Chennai

The Madras HC ruled on multiple issues for the assessee company. For advertisement expenditure through MRF Pace Foundation, the court held it was ... Expenditure incurred towards advertisement/business promotion in the form of MRF Pace Foundation is being charity in nature and hence, not an allowable deduction - HELD THAT:-Issue decided in the assessee’s own case in the appeals for AY 2006-07 and 2007- 08 in MRF Ltd. [2021 (4) TMI 501 - MADRAS HIGH COURT] as held the power of the Revenue is confined only to examine the purpose of genuineness of the expenditure and not the expediency or the quantum. Nowhere there is any observation either made by the Assessing Officer or the Tribunal that the expenditure was not genuine. In fact, Mr.T.Ravikumar would fairly submit that all other expenditure, which have been claimed by the assessee towards sponsorship, advertisement, have been allowed in its entirety. The Tribunal fell in error in coming to a conclusion that donations were extended towards the Pace Foundation, when the fact remains that the assessee has established the foundation and it is part and parcel of the assessee themselves and not a separate entity to draw any such inference of donation. Validity of reopening of assessment - notice issued beyond 4 years - AY 2002-03 - claims of deduction u/s 80HHC and 80IA - HELD THAT:- The provisions of Section 147, particularly the proviso thereto, enable the assessing authority to take action under Section 147 only in a case where there has been no full and true disclosure on the part of the assessee at the first instance. In light of our unequivocal findings that the claims of deduction under Sections 80HHC and 80IA have been fully and truly disclosed as part of the original returns of income, duly noticed by the assessing authority, discussed with the assessee in the course of assessment and figure in detail in the original order of assessment, we are of the considered view that the proceedings for re-assessment as far as AY 2002-03 are concerned are barred by limitation. The substantial question of law in relation to this issue for AY 2002-03 is hence answered in favour of the assessee Reassessment for AY 2004-05 - Explanation 2 to Section 147, sets out specific situations where the assumption of jurisdiction to re-assess has specifically been enabled by way of a deeming fiction. The adumbrated situations are deemed to be cases where income chargeable to tax has escaped assessment. One of such situations is the excess grant of deductions. In the present case, the reason for re-opening is that the grant of deduction under Sections 80HHC and 80IA by the assessing officer was in excess of what the appellant was entitled to. Thus, while the veracity or otherwise of that allegation in regard to excess claim of deduction requires to be tested, as far as the assumption of jurisdiction under Section 147 is concerned, we do not find any cause to intervene. The re-opening has been made within the time limit provided and the invocation of Explanation 2 to justify the assumption of jurisdiction to reassess is also in order, subject of course, to the process of re-assessment on merits. The substantial question of law in relation to assumption of jurisdiction under Section 147 for AY 2004-05 is answered in favour of the revenue and against the assessee. Reassessments for AY 2003-04, 2004-05 and 2005-06 - The first issue touches on the amendments made by way of the Taxation Laws Amendment Act, 2005 to Section 80HHC, with retrospective effect from 01.04.2000. The amendments were the subject matter of challenge before the Hon'ble Supreme Court and in the case of Commissioner of Income-tax v. Avani Exports [2015 (4) TMI 193 - SUPREME COURT] as upheld the amendments, though prospectively i.e., on and with effect from date of amendment being 01.04.2005, with respect to AY 2005- 06 onwards. Hence, the amendment cited as a reason for re-opening of the assessments, would have no application for AY 2003-04 & 2004-05. In this light of the matter, although we have upheld the assumption of jurisdiction for re-opening of assessment for AY 2004-05, the substantial question of law relating to deduction under Section 80HHC is, on merits, answered in favour of the assessee. Deduction u/s 80IA in respect of the rubber manufacturing units at Kottayam in Kerala and Medak in Andhra Pradesh - While Section 80IA continued to grant relief in respect of industrial undertakings or enterprises engaged in infrastructure development, Section 80IB provides for a deduction for industrial undertakings other than those engaged in infrastructure development. The business of the petitioner thus continued to be entitled to the benefit of deduction, though under Section 80IB. The effect of bifurcation of Section 80IA into 80IA and 80IB is a seamless continuation of the deductions under the new provisions and what was available under erstwhile 80IA would continue to be available under Section 80IB subject to compliance with the statutory conditions. Thus, the entitlement of an assessee that had claimed, and had been granted deduction under erstwhile Section 80IA was to be traced from the initial year when the claim had been successfully made, and would continue onward to the entire ten year period, straddling both pre and post 1999 (see the decision of Natraj Stationery Products (P.) Ltd. [2008 (11) TMI 48 - HIGH COURT DELHI] on this point). The petitioner had admittedly been granted relief under Section 80IA till 1999 and thereafter under Section 80IB till 2004-05. It is only in the instant re-assessment proceedings for AY 2002-03 and 2004-05 (AY 2004-05 being the last year of claim), that the claim has been questioned. Thus, even on first principles, we do not accept that, on identical facts and legal position, the department could find an assessee ineligible for a claim of deduction for only two years out of the ten year period. We reiterate that no material difference, or for that matter, any difference at all, has been pointed out in the factual and legal positions both pre and post the years in question. We conclude that that the denial of deduction under Section 80IA and 80IB is misconceived. ISSUES PRESENTED and CONSIDEREDThe judgment addresses several substantial questions of law concerning the reopening of assessments and the validity of certain deductions claimed by the assessee. The core legal issues considered include:(i) The validity of reopening assessments under Section 147 of the Income Tax Act for various assessment years (AYs), particularly whether such reopening was justified beyond the period of four years based on the same set of facts, and whether it constituted a change of opinion.(ii) The applicability of retrospective amendments to Section 80HHC and whether these amendments justified the reopening of assessments.(iii) The validity of disallowing deductions under Sections 80IA and 80IB, particularly in light of the business activities of the assessee and the provisions of the XIth Schedule of the Income Tax Act.(iv) The treatment of DEPB credit entitlement in computing deductions under Section 80HHC.(v) The nature of expenditures incurred towards the MRF Pace Foundation and whether these qualify as business expenditures or charitable donations.ISSUE-WISE DETAILED ANALYSISReopening of Assessments (AY 2002-03 and 2004-05)The legal framework under Section 147 allows the reopening of assessments if the Assessing Officer has reason to believe that income has escaped assessment. The proviso restricts reopening beyond four years unless there is a failure to disclose material facts fully and truly. For AY 2002-03, the court found that the original assessment had considered all relevant facts, and the reopening was barred by limitation. For AY 2004-05, the reopening was within four years, and the court upheld the assumption of jurisdiction under Section 147, subject to reassessment on merits.Retrospective Amendments to Section 80HHCThe court noted that the amendments to Section 80HHC by the Taxation Laws Amendment Act, 2005, were upheld by the Supreme Court prospectively from AY 2005-06. Therefore, these amendments could not justify reopening assessments for AYs 2003-04 and 2004-05.Deductions under Sections 80IA and 80IBThe court examined whether the assessee's activities fell within the XIth Schedule, which restricts certain deductions. The XIth Schedule lists specific products, and the court found that the entry concerning 'crown corks, or other fittings of cork, rubber, polyethylene or any other material' did not encompass rubber tyres manufactured by the assessee. The court applied the principle of ejusdem generis and concluded that the deductions were wrongly disallowed.DEPB Credit EntitlementThe court considered whether DEPB credit should be excluded in computing deductions under Section 80HHC. It found that the amendments to Section 80HHC did not apply to AYs before 2005-06, thus favoring the assessee's claim for earlier years.Expenditure on MRF Pace FoundationThe court referred to prior decisions involving the assessee, determining that expenditures towards the MRF Pace Foundation were business expenditures, not charitable donations. The court emphasized that the nature of the expenditure was akin to advertisement and business promotion.SIGNIFICANT HOLDINGSThe court held that the reopening of assessments for AY 2002-03 was barred by limitation due to the absence of new material facts. It upheld the reopening for AY 2004-05 but found the merits of the reassessment concerning Section 80HHC and 80IA deductions favored the assessee.The interpretation of the XIth Schedule was crucial, with the court rejecting the revenue's broad interpretation of the entry concerning rubber products. The court emphasized the need for a narrow interpretation consistent with the principle of ejusdem generis.The court concluded that expenditures on the MRF Pace Foundation were legitimate business expenses, aligning with prior decisions in the assessee's favor.Overall, the court's determinations favored the assessee on most substantial questions, emphasizing the importance of full and true disclosure and the limitations on reopening assessments based on the same set of facts.