Case Law Details
Procter & Gamble Home Products Ltd. Vs ACIT (ITAT Mumbai)
The Income Tax Appellate Tribunal partly allowed appeals filed by Procter & Gamble Home Products Ltd. for Assessment Years 2007-08 and 2008-09 against orders passed by the Commissioner of Income Tax (Appeals). The disputes involved ad-hoc disallowance of professional fees, trade incentive expenses treated as capital expenditure, taxation of notional rental income from shared premises, disallowance of related expenses, and transfer pricing adjustments. The assessee did not press the transfer pricing grounds during hearing, and those grounds were dismissed.
For AY 2007-08, the Assessing Officer disallowed Rs. 10 lakh out of professional fees claimed by the assessee on the ground that certain payments appeared capital in nature and complete details were not furnished. The Tribunal noted that similar disallowances had been deleted in the assessee’s own case for earlier assessment years. It observed that the Assessing Officer had not specified which items of professional fees were not wholly and exclusively incurred for business purposes. Following earlier orders in the assessee’s favour, the Tribunal deleted the ad-hoc disallowance.
The Assessing Officer had also disallowed 20% of trade incentive expenses amounting to Rs. 6.66 crore by treating them as capital expenditure incurred for brand promotion resulting in enduring benefit. The assessee explained that the expenditure consisted of incentive schemes and reimbursements paid to distributors as part of sales promotion and pricing strategies. The Tribunal held that such expenses formed part of the assessee’s business model and were revenue in nature. Relying on various judicial precedents including the Bombay High Court decision in the assessee’s own case, the Tribunal held that expenditure incurred for brand promotion and sales incentives is allowable as business expenditure even if incidental benefits accrue to third parties. Accordingly, the disallowance was deleted.
A major dispute related to arrangements between the assessee and its sister concerns, Procter & Gamble Hygiene and Health Care Ltd. (PGHH) and Gillette India Ltd. (GIL), for sharing office premises and common facilities. The Assessing Officer treated usage charges and reimbursements under the agreements as rental income assessable under the head “Income from House Property” and taxed notional rental income. The Assessing Officer also disallowed building-related expenses including repairs, maintenance, service charges, municipal taxes, and depreciation attributable to the allegedly let-out premises.
The assessee explained that the arrangement was primarily for sharing common facilities and costs among group companies engaged in related businesses with overlapping distribution and marketing channels. Although earlier agreements referred to usage charges of Rs. 90 per square foot, the assessee stated that such usage charges were never implemented and only reimbursement of expenses was carried out. Subsequent agreements effective from July 2006 did not contain clauses for charging such usage charges.
The Tribunal considered the procedural history of the dispute, including earlier Tribunal orders and Bombay High Court proceedings. The Bombay High Court had held in writ proceedings that, at least at the Tribunal level, the finding that receipts from PGHH were assessable under the head “Income from Other Sources” had attained finality. The High Court remanded the matter to the Tribunal for deciding only the pending issues relating to taxability of notional income and deductibility of expenses.
Following the Bombay High Court’s order, the Tribunal held that receipts from PGHH, GIL, and portions of the premises let out to third parties were taxable under the head “Income from Other Sources” and not “Income from House Property.” The Tribunal further held that notional rent could not be taxed under the head “Income from Other Sources” unless the Assessing Officer established that such income was actually received or receivable by the assessee. Since the Assessing Officer had not brought evidence to show receipt or accrual of such notional income, the Tribunal deleted the addition relating to notional rent.
The Tribunal also held that building-related expenses such as repairs, maintenance, service charges, and depreciation were allowable deductions under Sections 57(ii) and 57(iii) because they were incurred wholly and exclusively for earning income chargeable under the head “Income from Other Sources.” It further accepted the assessee’s contention that several common expenses included in the disallowance were unrelated to the building itself.
For AY 2008-09, the Tribunal observed that the issues relating to treatment of rental income, taxation of notional rent, professional fee disallowance, and trade incentive disallowance were identical to those in AY 2007-08. Applying the principle of consistency, the Tribunal allowed the corresponding grounds with similar directions. Both appeals were thus partly allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. These two appeals by assessee are directed against separate orders of learned CIT(A) dated 21.04.2014 & 13.04.2015 for assessment years (AY) 2007-08 & 2008-09 respectively. In both the appeals, the assessee has raised certain common ground of appeals, certain facts in both the orders are common, thus, with the consent parties, both the appeals were clubbed, heard together and are decided by common order to avoid the conflicting decision. For appreciation of facts, the facts in AY 2007-08 are treated as lead case. In Appeal for AY 2007-08 in ITA No. 4191/Mum/2014, the assessee has raised following grounds of appeal;-
Ground I:
a. On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) 15, Mumbai (“the CIT(A)”) erred in confirming the action of the Addl. Commissioner of Income-tax, Range 8(2), Mumbai (“the AO”) in disallowing professional fees of Rs. 10 lakhs on the alleged ground that the said expenditure were capital in nature and complete details were not furnished by the Appellant.
b. The Appellant prays that the disallowance of professional fees of Rs. 10 lakhs be deleted.
Ground II:
a. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in disallowing trade incentive expenses of Rs. 6.67 crores on the alleged ground that the said expenditure were in the nature of “brand promotion” giving the Appellant Company an enduring benefit and therefore, could not be allowed as revenue expenditure.
b. The Appellant prays that the disallowance of trade incentives of Rs. 6.67 crores be deleted.
Ground III:
a. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in bringing to tax an amount of Rs. 5.01 crores as rent for the alleged consideration for premises usage charges payable by Procter & Gamble Hygiene and Health Care Ltd (“PGHH”) and Gillette India Limited (“GIL”).
b. The CIT(A) further erred in holding that:
i. The “rental income” to the Appellant has started accruing as soon as the agreement was executed:
ii. The property has been given on rent to PGHH & GIL and there exist a relationship of “owner and tenant” between the Appellant and PGHH and Appellant and GIL;
iii. The primary object of the Appellant is to exploit the property by letting out a portion of it to its sister concern; and
iv. There is no commercial activity carried on by the Appellant other than the collection of service charges which is based on the turnover effected by each party occupying the premises,
v. He failed to appreciate and ought to have held that the purpose of entering into an agreement with PGHH was sharing of certain common facilities and not for renting of the premises in favour of PGHH and no tenancy rights were created in favour of PGHH.
vi. The Appellant prays that the addition of Rs. 5.01 crores lacs be deleted.
Without Prejudice to the Above:
Ground III:
i. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in assessing the alleged rental income under the head “Income from House Property”.
ii. The CIT(A) also erred in confirming the action of the AO in assessing the income earned from M/s. Nortel Network Private Limited and M/s. DSP Merril Lynch under the head “Income from House Property”.
iii. The Appellant prays that the said rental income be assessed under the head “Income from Business or Profession” as against the “Income from House Property”.
Without Prejudice to the Above:
Ground III:
i. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in assessing the alleged rental income under the head “Income from House Property”.
ii. He failed to appreciate and ought to have held that the same was temporally let out along with various facilities to the sister concern.
iii. The Appellant prays that the said amount (to the extent held as income) be considered as “Income for Other Sources”.
Ground IV:
i. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in disallowing Rs. 10.19 crores consisting of repairs & maintenance of building, service charges and depreciation on building, on the alleged ground that these expenditures have been incurred in relation to the let-out portion of the building
ii. He further erred in confirming the action of the AO of adopting the proportion of the “Space Rented Out” as basis for disallowing the expenditures without rejecting the method of apportionment of expenditure in the ratio of “Net Outside Sales” (“NOS”) as agreed between the Appellant and PGHH and adopted by the Appellant.
iii. He failed to appreciate and ought to have held that:
a. Nature of expenditure ought to be examined before treating the same as incurred in relation to the let-out portion of the building;
b. The expenditure claimed by the Appellant were in the nature of business expenditure of the Appellant; and
c. The expenditure incurred by the Appellant were in relation to its own use of the building.
iv. The Appellant prays that the disallowance of Rs. 10.19 crores be deleted.
Ground V:
i. If the alleged rental income from PGHH, GIL and rental income from Nortel Network Private Limited and DSP Merril Lynch is taxed under the head “Income from House Property”, in such case, only the expenditure related to building ought to be considered for disallowance and not the shared expenses which were not related to building at all.
ii. The Appellant prays that for the purpose of disallowance; the AO be directed to consider only building related expenses.
Ground VI:
i. On the facts and circumstances of the case, and in law, the CIT(A), erred in upholding /confirming the action of the AO/Transfer Pricing Officer (‘TPO’) in holding that the Appellant’s international transaction pertaining to rendering of support services to the associated enterprises(‘AEs’) is not at arm’s length and thereby confirming the addition of Rs. 41,30,973.
ii. In doing so, the CIT(A) erred in agreeing with AO/TPO’s actions of:
a. Disregarding the transfer pricing analysis carried out by the Appellant and re-determining the arm’s length price of the international transaction without appreciating that the none of the conditions set out in the Section 92C(3) of the Act are satisfied;
b. Rejecting Vatika Marketing Limited from the set of comparables;
c. Retaining Green Care Holdings Limited as a comparable company;
d. Not allowing the working capital and risk adjustments.
iii. The Appellant prays that the aforesaid adjustment to be deleted.
Ground VII:
i. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming action of the AO of charging interest u/s. 234 of the Act.
ii. The Appellant prays that the AO be directed to delete / appropriately reduce the interest u/s. 234.
Ground VIII:
i. The appellant craves leave to add to, alter or amend all or any of the above grounds of appeal at the time of hearing.
Additional Grounds of appeal;
i. On the facts and in the circumstances of the case and in law, the Transfer pricing Officer (TPO) and thereby the OA erred in considering K C Maritime (India) Limited in its comparability analysis which is functionally dissimilar to the Appellant.
ii. It is prayed that the above company be excluded from the set of comparables considered by the TPO for comparability analysis.
2. In Appeal for AY 2008-09in ITA No. 2876/Mum/2015, the assessee has raised following grounds of appeal; –
Ground I:
i. On the facts and circumstances of the case, and in law, the Learned Commissioner of Income Tax (Appeals)-57. Mumbai [‘CIT(A)’] erred in upholding / confirming the action of the Learned Assessing Officer (AO)/ Transfer Pricing Officer (TPO) in holding that the Appellant’s international transaction pertaining to rendering of support services to the associated enterprises(‘AEs) is not at arm’s length and thereby confirming the addition of Rs. 98,08,785/-.
ii. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in upholding /confirming the action of the AO/TPO in:
a. rejecting the Transfer Pricing study which was maintained in good faith and with due diligence;
b. rejecting the search process followed by the Appellant;
c. rejecting multiple year data;
d. including certain comparables, which were not comparable;
e. not including certain comparables selected by the Appellant in its TP Study / submitted during the course of assessment proceedings;
f. not granting working capital adjustment;
g. not granting risk adjustment.
Domestic Tax Grounds:
Ground No. II:
i. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in bringing to tax an notional amount of Rs. 4.55 crores as rent u/s. 22 of the Act for the alleged consideration for premises usage charges payable by Procter & Gamble Hygiene and Health Care Ltd (“PGHH”) and Gillette India Limited (“GIL”).
ii. The Appellant prays that the addition of Rs. 4.55 crores lacs be deleted.
Ground No. III:
i. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in assessing the alleged rental income under the head “Income from House Property”.
ii. The CTT(A) also erred in confirming the action of the AO in assessing the income of Rs. 4.91 crores earned from M/s. Nortel Network Private Limited and M/s. DSP Merril Lynch under the head “Income from House Property”.
iii. The Appellant prays that the said rental income be assessed under the head “Income from Business or Profession” as against the “Income from House Property”.
Ground No. IV:
i. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in assessing the alleged rental income under the head “Income from House Property”.
ii. He failed to appreciate and ought to have held that the same was temporally let out along with various facilities to the sister concern.
iii. The Appellant prays that the said amount (to the extent held as income) be considered as “Income for Other Sources”.
Ground No. V:
i. On the facts and circumstances of the case and in law, the CIT(A) erred
in confirming the action of the AO in disallowing Municipal Taxes of Rs. 1.21 Crores, administrative expenses of Rs. 27.09 lacs, Repairs and Maintenance of Rs. 33.39 lacs and depreciation of Rs. 299.73 lacs, on the alleged ground that these expenditures have been incurred in relation to the let-out portion of the building.
ii. He further erred in confirming the action of the AO of adopting the proportion of the “Space Rented Out” as basis for disallowing the expenditures without rejecting the method of apportionment of expenditure in the ratio of “Net Outside Sales” (“NOS”) as agreed between the Appellant and PGHH. GIL and adopted by the Appellant.
iii. The Appellant prays that the disallowance of above expenditure be deleted.
Ground No. VI
i. If the alleged rental income from PGHH, GIL and rental income from Nortel Network Private Limited and DSP Merril Lynch is taxed under the head “Income from House Property”, in such case, only the expenditure related to building ought to be considered for disallowance and not the shared expenses which were not related to building at all.
ii. The Appellant prays that for the purpose of disallowance; the AO be directed to consider only building related expenses.
3. At the time of hearing, the learned authorised representative (AR) of the assessee submits that he is not pressing grounds of appeal related with transfer pricing issues in both the years. Hence, the corresponding grounds of appeal related with transfer pricing issues in both the years are dismissed.
4. Brief facts of the case qua remaining grounds in AY 2007-08 are that the assessee company is engaged in the business of manufacturing, marketing, selling of several consumer products. The assessee filed its return of income for AY 2007-08 on 29.10.2007 declaring income of Rs. 57.60 Crore. The case was selected for scrutiny. During assessment, the Assessing Officer (in short ‘AO’) noted that the assessee has claimed expenses of Rs. 85,58,205/- against professional fees. On show case, the assessee, furnished required details vide their submission dated 23.11.2010. On going through, such details, the AO was of the view that assessee has made a general submission. Some of the payments pertain to project expenses. Certain payments were in respect of conducting investigation, on research, transfer pricing study report and other payments which are capital in nature. The AO was not satisfied with such explanation and held that assessee has not discharged its onus in justifying such payment on such professional services. The AO thereby made ad-hock disallowance Rs. 10 lakhs by taking view to the extent of Rs. 10 lakhs expenditure was not exclusively for the purpose of business.
5. The AO further noted that assessee in its profit and loss account has debited expenditure of Rs. 42.69 Crore under the head ‘trade incentive’. In earlier year, the assessee has shown similar expenses of Rs. 24.83 Crore. On show case, the assessee explained that their sales turn over has increased in the year and thereby sales incentive also increased by Rs. 17.86 Crore. The assessee also explained that trade incentive includes incentive of scheme reimbursement expenses made to distributor incurred by them under various scheme offered by assessee company from time to time. Due to price reduction, such reimbursement was made. Further, such incentive includes brand promotion expenses. The assessee also explained that such expenses were including of promotion sales policy during the year. The reply of assessee was not accepted by the AO. The AO was of the view that assessee spend large sum of money to distributors in the name of ‘brand promotion’ as reimbursement on account of incentive scheme. The AO made ad-hock disallowance of 20% of total such expenses thereby worked out disallowance of Rs. 6.66 Crore.
6. The AO further noted that assessee entered into agreement with associate company viz. Procter & Gamble Hygiene Healthcare Limited allowing them to use office building owned by assessee and also sharing certain common expenses with regard to such building. In support of such arrangement, the assessee furnished agreement dated 29.08.2003 which is effective from 01.04.2001. On going through various clause of agreement, the AO recorded his observation in para 9.1 of assessment order. The AO noted that for use and occupation, the part of office building and for availing certain services, the assessee received compensation/reimbursement as has been listed in Annexure-I to the agreement. As per Annexure-I of the agreement, the condition for usage charges is @ Rs. 90 per square feet for the built-up area. There is reference of non-refundable security deposit equivalent to six months’ compensation by associate company. The assessee is also entitled for various other expenses like furniture, power and firefighting, water, electricity, generator charges, administrative expenses and various other items mentioned in Annexure-I. The AO was of the view that such agreement is in the form of rent agreement. The AO asked as to why such usage charges should not be treated as income from house profit, as has been held in earlier years assessment order. The assessee was also asked to furnish exact area shared with the associate/group companies and to furnish depreciation and other maintenance expenses incurred as the part of common services expenditure. The assessee filed its reply dated 01.12.2010, relevant part of which is extracted in para 9.4 at page 14 of assessment order. In the reply, the assessee stated that total required expenses shared by assessee with group company is Rs. 28.87 crore under operation and other expenses and Rs. 9.73 Crore under payment of employees. Ledger on such services was also furnished. Such cost sharing was based on agreement dated 01.07.2006, though it was executed on 03.06.2009. The AO was not satisfied with the explanation and details furnished by assessee. The AO, as per his working in para9.27 of assessment order treated such receipt as income from house property on account of rent received/receivable from group companies at Rs. 7.77 crore under the head income from house property and after allowing standard deduction, Municipal tax and other expenses worked out net annual value of Rs. 5.01 Crore and taxed the same under the head income from house property.
7. Aggrieved by the action of AO, the assessee filed appeal before CIT (A). Before CIT (A), the assessee furnished similar explanation in respect of third addition. The Ld. CIT(A) confirm the action of assessee on all three additions. Further aggrieved, the assessee has filed present appeal before this Tribunal.
8. We have heard the submission of learned AR of the assessee and the Ld. Commissioner of Income Tax-Departmental representative (CIT- DR) for the revenue. The Ld. AR of the assessee submits that the ground No. 1 related to ad hock disallowance of professional fees. The Ld. AR of the assessee submits that similar disallowances are bone of contention between the assessee and the AO from earlier preceding/ assessment years. Similar disallowance was made in AY 2004-05, which was confirmed by ld CIT(A).However, on further appeal before Tribunal similar disallowances was deleted in ITA No.1286/Mum/2009. By following the decision of Tribunal in AY 2004-05, similar disallowances were deleted by ldCIT (A) in AY 2005-06. Thus, this issue is now covered in favour of the assessee. Further, copy of decision of Tribunal in AY 2004-05 in ITA No. 1286/Mum/2009 and order of CIT(A) in AY 2005-06 is filed.
9. On the other hand, the Ld. Sr. DR for the revenue submits that the decision in AY 2004-05 by Tribunal is not applicable as the facts of the year under consideration was different.
10. We have considered the rival submission of both the parties and gone through the orders or lower authorities carefully. We find that assessee has claimed total professional expenses of Rs. 85,58,205/- on account of various professional fees. The AO disallowed Rs. 10 Lakh on ad hoc The Ld. CIT(A) confirmed. We find that on similar ground of appeal, the coordinate bench of Tribunal in assesses own case in AY 2004-05 deleted the similar disallowances. We find that in AY 2005-06, the AO disallowed the similar expenses. The CIT(A) allowed relief to the assessee in AY 2005-06 by following order of AY 2004-05. Thus, this issue is covered in favour of the assessee. Otherwise, we find that the AO while making ad hoc disallowance has not specified as to which item of professional fees is not wholly and exclusively for the purpose of business. Thus, considering the decision of Tribunal in AY 2004-05 (supra), we do not find any justification for making such ad hoc disallowance. In the result, ground No. 1 of the appeal is allowed.
11. Ground No. 2 relates to 20% of trade incentive expenses as brand promotion expenses tearing it capital in nature. The Ld. AR of the assessee submits that sales promotion and advertisement expenses are not capital expenditure and should be allowed as business expenditure. The higher Courts in series of decision have allowed sales promotion expenses, incentive in advertisement taxes as a business expense. To support his submission, the Ld. AR relied upon the decision of jurisdictional High Court in CIT vs. Procter & Gamble Home Products Limited reported in (377 ITR 66 Bombay) wherein it was held that expenditure incurred by assessee on film production by way of advertisement films was allowed as revenue expenditure. The Ld. AR also relied upon the following case laws:-
(a) CIT vs. Geoffrey Manners & Co. Ltd. [2009] 315 ITR 134 (Bombay HC).,
(b) CIT vs. Intercontinental Hotels Group India (P.) Ltd. [2013taxmann.com 153 (Delhi Tribunal).,
(c) CIT (Mumbai) vs. Asian Paints (India) Ltd (75 taxnmann.com 152) (Bom HC),
(d) DCIT (Mumbai) vs Polygel Industries (P.) Ltd (68 SOT 130) (Mumbai Tribunal)
(e) Fine Jewellery (India) Ltd vs. ACIT (165 TTJ 705) (Mumbai Tribunal),
(f) Brightest Circle Jewellery (P.) Ltd vs. ACIT Mumbai 154 TTJ 571 (Mumbai Tribunal),
(g) ACIT vs. Janson Industries Ltd. 194 TTJ 19 (Chennai Tribunal),
(h) DCIT vs. Warner Lambert (India) (P.) Ltd. [2013] 33 taxmann.com 686 (Mumbai Tribunal)
(i) Hemraj Nebhomal Sons vs CIT [2005] 278 ITR 345 (Madhya Pradesh HC)
12. The Ld. ARfor the assessee in alternative submission submits that such expenditure is to be allowed, even if incidental benefit is received by third party. To support his submission, the Ld. AR mainly relied upon the decision of Delhi High Court and PCIT vs. Seagram Manufacturing Private Limited 2018 com2013 Delhi High Court. The Ld. AR of assessee also submits that it is not open for the department to adopt subjective standard on reasonableness and disallowed part of business as expenditure.
13. On the other hand, the Ld. Sr. DR for the revenue supported the order of lower authorities. The Ld. Sr. DR submits that the assessee has claimed huge expenses under the garb of incentive/trade incentive scheme. The expenses during the year were substantially increased comparative to the earlier year. The AO, thus, reasonably disallowed 20% of such expenses.
14. We have considered the rival submission of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by parties. We find that during the year under consideration, the assessee debited Rs. 42.69 Crore on account of trade incentive and brand promotion expenses. The AO disallowed 20% of such expenditure and by taking view that such expenses were exclusively indicated for promotion of brand of various products which is enduring benefit and take it a capital expenditure and disallowed to the extent of 20% and worked out on disallowance of Rs. 6.66 Crore. The Ld. CIT(A) confirm the action of the AO by taking the view that observation of AO have not been rebutted by assessee it its submission and thus, he has no reason to deviate from the finding of AO. We find that assessee has incurred/allowed such trade incentive as a part of their business model. Such expenses in respect of promoting of products, is to be considered as revenue expenses. Similar view was taken by jurisdictional High Court in assesses own case reported in CIT vs. Procter & Gamble Homes Products Limited (supra). We further find that Delhi Tribunal in ACIT vs. Intercontinental Hotel Groups India Private Limited (supra) also held that advertisement expenses incurred by the assessee in promotion of brand belonging to its parent company, was to be allowed as business expenditure. Further, the Hon’ble Delhi high Court in PCIT vs. Seagram Manufacturing Private Limited (supra) also held that where assessee incurred expenses for brant popularity merely because overseas of all the brand also gained some benefit, claim of expenditure as a business expenditure should not be denied. Thus, in view of the aforesaid legal position, we do not find any justification in disallowing 20% of trade incentive by taking view that it was revenue nature and that it was incurred for the promotion of brand on various products and were enduring benefit. In the result, ground No. 2 of appeal is allowed.
15. Ground No. 3, 3A,4 & 5 [(III), 3A (IIIA), IIIB, IV and V] relates to taxing notional income in the hands of the assessee in respect of owned property shared with its sister concernsas also let out to certain third parties and disallowance of certain expenses treated by the AO as being related to the said premises. The ld AR of the assessee extensively argued these grounds of appeal and at the conclusion of hearing he was asked to furnish a written note on his submissions. The ld AR of the assessee at the time of his submissions sought permissions to explained the background of from AY 2004-05 and with the help of a separate compilation of relevant orders for that year containing pages 1 to 49. The factual background is explained in the following way;
(i) The Assessee is engaged in the business of manufacturing (including through job work) and trading of laundry, hair care, skin care, baby care, air freshener and fem care products (“Home Products”). Its sister concern, namely, Procter & Gamble Hygiene and Health Care Lid (“PGHH”) is engaged in the manufacture and sale of personal care and health care products like Vicks, Whisper, etc. (“Healthcare products”).
(ii) As the marketing/distribution channels (such as medical stores, etc.) of the Assessee and PGHH (Appellant’s sister concern) are common, both the aforesaid parties shared the office building owned by the assessee in such a manner that can enable their marketing/production planning teams to sit together for a seamless flow of work. While this arrangement was in place since 2001, the parties formalized it by way of an agreement dated August 29, 2003 (effective from April 01, 2001) for sharing of certain common facilities. Clauses 1 to 7 thereof deals with sharing of common premises and Clauses 8 to 10 deals with sharing of common costs, which are part of paper book.
(iii) Clause 2 of the aforesaid agreement read with Annexure I thereof refers to compensation/ usage charges of Rs. 90 per sq. ft. “and/or” reimbursement of certain expenses as may be agreed between the parties. Accordingly, it was only the reimbursement of expenses that was implemented between the parties. In other words, the usage charges of Rs. 90/- per sq. ft. were never implemented between the assessee and its sister concern. Also, the corresponding security deposit was never implemented.
(iv) Clauses 8 and 9 of the aforesaid agreement read with Annexure Il thereof refers to sharing of common expenses in the ratio of net sales of the companies. These expenses are not necessarily the expenses incurred in respect of the commonly used premises, hut several other expenses incurred across various centres all over the country.
(v) The AO in AY 2004-05 assessed the notional income of Rs. 90/- per sq. ft. as Income from House Property (“HP”) in the hands of the assessee and consequently, disallowed building related expenses such as repairs & maintenance of budding, service charges and depreciation on building. The disallowance of said expenses included not only expenses related to the common office building but also the expenses shared by the two companies in accordance with Clauses 8 and 9 read with Annexure II of the agreement mentioned above. The Id. CTT(A) confirmed the addition made by the AO.
(vi) On further appeal before Tribunal in AY 2004-05 in its order June 06, 2016 in ITA No. 3531/Mum/2014 held that the income so receivable from PGHH was assessable as Income from Other Sources (“OS”) following the decision in PGHH’s cases (initially incorrectly referred to as own case, later corrected in assesses MA) for earlier years. However, the Tribunal not adjudicated the grounds relating to non-taxability of notional income and the allowability of expenses.
(vii) The Department filed an appeal before the Hon’ble Bombay High Court (ITA No 1052/2017) challenging the said order of the Tribunal, which is pending adjudication till date.
(viii) In the interim, the Appellant Assessee filed a Miscellaneous Application (“MA”) before the Tribunal inter alia stating that,
> Notional income cannot be taxed under ‘OS’ considering the real income theory:
> Grounds relating to the allowability of building related expenses were not adjudicated, and
> Reference was incorrectly made to the assessees case instead of PGHH while considering the Tribunal’s order for the earlier years.
On the other hand, the Department also filed an MA stating that fixation of head “other sources” by Tribunal is a mistake apparent from record since PGHH could not have been regarded as precedents and therefore, the whole order deserved to be recalled.
(ix) The Tribunal vide its order dated July 28, 2017 recalled the entire order dated June 06, 2016, thereby allowing both the MA’s.
(x) The assessee filed a Writ Petition before Hon’ble Bombay High Court vide WP No. 2738/2017, challenging the Tribunal’s order dated July 28, 2017 to the extent it had allowed Department’s MA. The Hon’ble Bombay High Court vide its order dated March 10, 2018,set aside the Tribunal’s order to the extent it allowed Department’s MA and remanded the matter to the Hon’ble Tribunal to adjudicate the pending grounds and examine the applicability of taxing notional income under the head “ other sources”.
(xi) Thus, the issues which survived before the Tribunal pursuant to the Hon’ble High Court order were:
-
- Whether any notional income could be added given the finding that the income receivable from PGHH was “income from other sources”? and
- Whether the disallowance of expenses could be justified when income is not taxable as “income from house property”?
(xii) However, the Tribunal re-adjudicated the entire matter and held that the rental income is assessable under the head “house property” vide its order dated September 02, 2022, and the pending grounds relating to disallowance of expenses were remanded to the AO.
(xiii) The assessee once again filed a Writ Petition before the Hon’ble Bombay High Court, vide WP No. 1960 of 2023, where the Hon’ble High Court vide order dated February 24, 2025 set aside the Tribunal’s order holding at para 9 that the finding that income in assessable as “other sources” had attained finality at the Tribunal level and directed the Hon’ble Tribunal to decide only the pending grounds relating to taxing the notional income and disallowance of expenditure. The relevant extract of the order is as follows;
“9. Based on the facts we narrated above, we are satisfied that, at least qua the ITAT, the finding that income receivable from PGHH was “income from other sources” had attained finality …….
15. Accordingly, we set aside the ITAT’s order dated 2 September 2022 and once again remand the matter to the ITAT to decide grounds Nos. 1, 4, and 5 in the petitioner’s appeal before the ITAT, appeal No.3531 of 2014. The Rule is made absolute without costs order”
The ld AR of the assessee submits that Ground No, III relate to taxation of notional income under the head ‘OS’, Ground No. 4 relates to disallowance of repair, maintenance and building related expenses and Ground No. 5 relates to disallowance of proportionate building related expenses if rent income received from the third party (Nortel Network) is to be charged under the head house property.
(xiv) Therefore, as per the Hon’ble High Court’s order dated February 24, 2025, the head of income as regards the rental income being ‘OS’ has become final qua the Tribunal. Further, the small portion of area which is let out to third parties from whom rent is actually received is also held to be ‘OS’. The only grounds which now remain to be adjudicated for AY 2004-05 is the taxability of notional income under “OS” and deductibility of building related expenses related to PGHH and third parties.
16. The ld AR of the assessee submits that as compared to AY 2004-05, the facts relating the above issue remain same in AY 2007-08 as well as in AY 2008-09, subject to the following two factual differences: firstly, inclusion of Gillette India Limited (“GIL”), one more sister concern, under the cost-sharing arrangement with PGHH. And secondly execution of fresh agreements on June 3, 2009 (effective from July 01, 2006), which do not contain any clause for charging compensation/usage charges of Rs. 90/- per sq. The AO and CIT(A) alleged that since the earlier agreement effective from 2001 was not expressly terminated, the said agreement was still in force and therefore, notional rent at Rs. 90/- per square feet was receivable even in AY 2007-08 and AY 2008-09 for the premises let out. Accordingly, the lower authorities taxed notional rental income at the rate of Rs. 90/- per square feet under the head income from house property and disallowed building related expenses. It was explained that under the old agreement, in accordance with Clause -2 which provided for compensation/usage charges of Rs. 90/- per squarefeet and/ or reimbursement of expenses as may be agreed between the parties the assessee and its sister concern did not implement the usage charges of Rs. 90/- per square feet for the area shared but implemented the reimbursement of expenses as envisaged under the agreement. Commercially, it was deemed fit not to implement the usage charges per square feet because it was very difficult to identify the square feet area occupied by the group companies. Therefore, even if it is assumed that the said old agreement is still in effect, the head of income would be ‘OS’ as per Hon’ble High Court’s order. Once the income is assessable as ‘OS’, notional income cannot be brought to tax under this head. Consequently, the disallowance of building related expenditure such as repairs & maintenance of building, service charges and depreciation on building is not sustainable. Section 57(ii) and section 57(iii) of the Act expressly permits complete deduction of expenditure laid out wholly and exclusively for earning income chargeable under the head ‘OS’. Besides the amount of disallowance of expenses includes several other common expenses which are not commonly used property. Such disallowance in any case is unwarranted.
17. On the basis of above submission, the ld AR of the assessee submits that once, the head of income is finalized as “other sources” as per Hon’ble High Court’s order, it is respectfully submitted that: no notional income can be assessed to tax under ‘other sources” in AY 2007-08 and AY 2008-09, and in the disallowance of building related expenditure in the said assessment yours relating to sister concerns and third parties deserves to be deleted; and in the disallowance of common expenses unrelated to building in the said assessment years should any way may be deleted.
18. On the other hand, the ld CIT-DR for the revenue supported the order of AO & CIT(A). The ld. CIT-DR for the Revenue submits that the agreement between the assessee and its associate companies clearly shows that it is a lease agreement. The assessee has also received advance equivalent to the six months’ rent. So, any receipt received against usage of area is to be taxed as income from house property.
19. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on decision on Hon’ble Jurisdictional High Court in assesses own case in Writ Petition No. 1960 of 2023. On considering the treatment / action of assessing officer in earlier years as well as in the current assessment year, we find that ld. AR of the assessee has correctly explained the fact with regard to issue under consideration. We find after the decision of Hon’ble High Court’s order dated February 24, 2025; the head of income as regards the rental income being ‘OS’ has become final. Thus, following the decision of Hon’ble High Court, receipt of rent payable by PGHH and GIL is held as income from other sources. So far asother small portion of area, which is let out to third parties, on same principle as per the decision of jurisdictional High Court is also to the taxed under the headother sources.
20. So far as taxing the notional rent is concerned, we find merit in the submission of ld. AR of the assessee that once the income is assessable as ‘OS’, notional income cannot be brought to tax under this head. Consequently, the disallowance of building related expenditure such as repairs & maintenance of building, service charges and depreciation on building is not sustainable. We also find merits in the submission of ld AR of the assessee that section 57(ii)&(iii) of the Act expressly permits complete deduction of expenditure laid out wholly and exclusively for earning income chargeable under the head ‘OS’. Thus, the assessee is also eligible for all such deduction which are incurred wholly and exclusively for the purpose of income from other sources. So far as taxing of notional income is concerned, it cannot be taxed unless the AO brought any evidence that such income is received or receivable by the assessee. Thus, in view of aforesaid discussion, we do not find any justification for taxing notional rent.In the result, ground No. 3 of the appeal is dismissed. In the result, ground no. 3 and all alternative ground No. 4 & 5 raised by assessee are allowed. Ground related with interest under section 234B is consequential.
21. In the result, appeal of the assessee is partly allowed.
ITA No. 2876/Mum/2015 (A.Y.: 2008-09)
22. Ground no. 1 relates to T.P. support services. The ld. AR of the assessee at the time of hearing not pressed such ground of appeal. Resultantly, ground no. 1 of appeal is dismissed.
23. Ground no. 2 to 6 relates to treatment of rental income as income from house property and taxing the notional rent. We find that these ground of appeal are similar to ground no. 3 to 5 of appeal for A.Y. 2007-08, which we have partly allowed. Thus, following the principle of consistency, these grounds of appeal are allowed with similar direction.
24. Ground no. 7 relates to ad-hoc disallowance of professional fee. We find that this ground of appeal is similar to the ground no. 1 in appeal for A.Y. 2007-08, which we have allowed. Thus, following the principle of consistency this ground of appeal is allowed with similar direction.
25. Ground no. 8 relates to ad-hoc disallowance of trade incentive expenses as brand promotion expenses by treating capital in nature. We find that this ground of appeal is similar to the ground no. 2 in appeal for A.Y. 2007-08, which we have allowed. Thus, following the principle of consistency this ground of appeal is allowed with similar direction.
26. In the result, appeal for A.Y. 2008-09 is also partly allowed.
Order was pronounced on 06/04/2026 in open Court.
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