Case Law Details
RELEVANT PARAGRAPH
13. Explanation 2 to section 147 has widened the scope of assessment or reassessment by providing three clauses in which the income chargeable to tax shall be deemed to have escaped assessment. Clause (a) deals with the situation in which no return of income has been furnished by the assessee although the total income in respect of which he is assessable exceeded the maximum amount which is not chargeable to tax. Clause (b) deals 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 u/’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 section 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 the section 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 application of mind by the AO on a particular item of income or expenditure so as to bar it from inclusion in the reassessment. Where the information was available before the AO in the original assessment but it escaped his attention, then it cannot be said that the said item of income has attained finality so as to merit exclusion in reassessment. Explanation 1 to section 147 makes the things very clear, which provides that the production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure. When Explanation 2 is read in juxtaposition to Expl. 1 and the main provision of section 147, it becomes crystal clear that, subject to other provisions, in a case where the original assessment was framed u/s 143(3) and subsequently it comes to the notice of the AO that still some income chargeable to tax has escaped assessment, he can get the assistance of the provisions of section 147 provided it does not amount to the change of opinion.
14. From the copy of reasons placed before us we find that the AO had interalia referred to the disallowable depreciation wrongly claimed by the assessee on land along with the assessee not offering interest on income-tax 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). Further it is an admitted position that these two items were also not the subject matter of inclusion in the undisclosed income in the block assessment. In our opinion the belief of the AO about the escapement of income chargeable to tax,; at the time of issuing” notice u/s 148, in respect of these two items cannot be disturbed. At this juncture it is pertinent to mention that the Id. Senior AR has also pressed into service the first proviso to section 147 as per which where an assessment has been made u/s 143(3), then no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. In the opinion of the Id. Senior AR the assessee 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 income tax 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 Id. Senior AR 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 th? Bench if the assessee had offered this interest for taxation in any year, either preceding or current or the succeeding. The Id. Senior AR replied it in the negative. Thus it is clear that the assessee did earn the interest income on income-tax refund, which is otherwise chargeable to tax but failed to offer it for taxation in any year. It is further noted that the Assessing Officer 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 Id. GIT(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 the 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 cost. The law does not permit a person to both approbate and reprobate.
15. 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 Assessing Officer, the initiation of reassessment cannot be declared as invalid. Since the two additions/disallowa nces qua the depreciation on land the interest on income tax 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.
16. The next ground is against the sustenance of the disallowance on account of advertisement expenses. The Id. Senior AR submitted that even if the initiation of reassessment was held to be valid for any other reason, the AO was not entitled to consider this item in the reassessment. Before going into the merits of the addition, we will first examine as to whether the initiation of reassessment proceedings could have been done in respect of advertisement expenses added by the Assessing Officer in the block assessment amounting to Rs.527.85 lakhs. Thereafter we will see that if the initiation of reassessment could not have been done on this issue, was the Assessing Officer still entitled to make disallowance in respect of these expenses while passing the reassessment order, legally as well as on merits.
17. Here it would be relevant to mention the facts on this issue a little more elaborately. The assessee had claimed advertisement and publicity expenses amounting to Rs.994.63 lakhs and in the order passed by the A.O. u/s. 143(3) no. disallowance was made out of such expenses. The Assessing Officer during the block assessment proceedings came to the conclusion that the entire advertisement expenses could not be allowed as deduction inasmuch as a part of these 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 23.12.1994 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 clause 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 clause 13 of the agreement. In lieu of making available the trade mark to JLL, the assessee was to receive royalty as per clause 16 of the agreement. Further according to clause 19 the assessee was to ensure continuance of sufficient advertisement of the brand and trade mark. As per clause I6(iii) JLL was to reimburse to the assessee on demand the expenses with reference to the market covered by it and the said sum was to be determined from time to time with mutual deliberation and consent. It is an admitted position that apart from making available the trade mark to JLL, the assessee, in his individual capacity, also used the said trade mark. Charts have been prepared at page 12 of the assessment order showing that the assessee made sales in the States of Kerala / Tamil Nadu in his individual capacity at Rs.2369.71 lakhs in the year in question and in the other areas at Rs.480.83 lakhs. Thus the total sales effected by the assessee in this year amounted to Rs.2850.54 lakhs. On the other hand JLL effected sales in the States of Kerala / Tamil Nadu at Rs.406.25 lakhs by using the trade mark “Ujala” and in other areas at Rs.805.76 lakhs, thereby making the total of sales at Rs. 1257.01 lakhs. The case of the Assessing Officer, during the block assessment proceedings was that the assessee had not got the reimbursement of expenses on advertisement as per clause 16 of the agreement. He determined a sum of Rs.583.71 lakhs as having been incurred by the assessee towards JLL, which in his opinion was to be reimbursed to him. It was noticed by him that the assessee had shown reimbursement from JLL only to the tune of Rs.55.86 lakhs, thereby leaving the balance of Rs.527.85 lakhs which was not reimbursed to the assessee. The addition for this sum was made by the Assessing Officer in the block assessment order passed on 30.11.2002. When the assessee agitated the block assessment before the learned first appellate authority, the Assessing Officer issued notice dated 26.3.2003 u/s.148 inter alia in respect of the advertisement expenditure added by him in the block assessment. It is a matter of record that the Commissioner of Income Tax (Appeals) decided the appeal against the block assessment order vide his order dated 31.3.2003 and deleted the addition of Rs.527.85 lakhs. Thus it is seen that the Assessing Officer formed his opinion about the alleged escapement of income before passing of the appeal order by the learned CIT(A) against the block assessment. Even from the reasons recorded by the Assessing Officer it is seen from para 9.1 of the reasons that this item was 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 Income-tax Act, 1961”. Again in para 9.2 of the reasons, the Assessing Officer 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 Assessing Officer, 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 Assessing Officer changed his opinion and came 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 and the Department has carried the matter before the Hon’bh High Court by assailing that the addition was to be made in the block assessment.
18. Under these circumstances it has to be determined whether the action of the A.O. was justified in reopening the assessment on the ground that the advertisement expenditure was liable to be disallowed to the tune of Rs.527.85 lakhs. We have reproduced the relevant part of section 147 in an earlier para. From the language of this provision it can be seen that the reopening can be done where the Assessing Officer has reason to believe that any income chargeable to tax has “escaped assessment” for any assessment year. Thus the essence of this provision is to arrest the income that has escaped assessment and then brining to tax. In other words the Assessing Officer should have belief about any income escaping assessment. An item of income is said to have escaped assessment if it is not charged to tax. If on the other hand an income has already been charged to tax in the hands of the same assessee and for the same period, albeit in the proceedings under some different section, it cannot be said that an income chargeable to tax has escaped assessment. It cannot be so more particularly when no decision has been given by any appellate authority reversing the addition made by the AO. We are at loss to appreciate as to how the disallowance of Rs.527.85 lakhs out of the advertisement expenses can be a reason to believe for the Assessing Officer that the income has escaped assessment, when he had himself taxed the same in the block assessment of this very assessee for the period which also covers the year in question. Further the taking up the appeal before the Hon’ble High Court against the order of the Tribunal deleting the addition in the block assessment clearly indicates that the department is still of the opinion that the income has been rightly put to tax in the block assessment. Once this is the view of the Department, then how can it entertain a diagonally opposite view that this income has escaped assessment. The Hon’blc Bombay High Court in Mira Naik VS. DICT (supra), in almost similar situation, has held that :There is much substance in the contentions of the assessees that the search having resulted in block assessment and the Department having resorted to s. 158BA to s. 158BC, it cannot be said that the income escaped assessment. In these proceedings 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 Id. DR 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 A.O., it comes up from para 9.2 that he had taken the steps for including this amount in the reassessment with a view to protect the interest of Revenue, but he had not specifically spelt out his mind that the addition was to be made on protective basis. It is another matter that while passing the order u/s.143(3) r.w.s. 147 addition of Rs.527.85 lakhs was made on protective basis. Be that as it may, we shall proceed to decide the matter with the presumption that the AO reopened the original assessment made u/s 143(3) on this count for the purpose of making the disallowance of advertisement expenses on protective basis.
22. Coming back to our point we have to examine whether protective assessment/ addition is possible u/s 147 in respect of the same person and for the same period. When a regular assessment is made and later on it comes to the notice of the AO that some income chargeable to tax has escaped assessment, he can resort to these provisions for reassessment. But if, as is the case under consideration, after the passing of the regular assessment order, the AO has passed a block assessment order u/s 158BC pursuant to search and seizure proceedings u/s 132 and included one income in the block assessment, is he empowered to include the same income, on protective basis, in the reassessment of the original regular assessment for the year, which is included in the block period ? Before answering this question, it will be relevant to see the effect of the answer in positive or negative. If the answer is given in affirmative it will mean that the AO is empowered to include it in the reassessment on the protective basis. Thus there will be presumption that though the AO had included such income in the block .assessment, but .he .still, has the reason to believe that this income is also taxable in the regular assessment. This presumption will belie the concept of reassessment which is always there to tax an income which is chargeable to tax but has escaped assessment. In order to give a different colour, the Id. DR contended that this disallowance was made on protective basis only and hence cannot be equated with the substantive disallowance. We have noted above about the validity and presumption of the protective assessment in general. Protective assessment cannot be independent of substantive assessment. Thus protective assessment is always successive to the substantive assessment. There may be a substantive assessment without any protective assessment, but there cannot be any protective assessment without there being a substantive assessment. In simple words there has to be some substantive assessment/addition first which enables the AO to make a protective assessment/addition . Substantive addition/assessment is made in the hands of the person 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 u/s 147. Even if for a moment we agree with the Id. DR 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. In that case again it will tantamount to reopening assessment on the basis of an item of income or disallowance, which has already _. heeaxnade in block assessment of the assessee, thereby leaving no income escaping assessment. Under these circumstances we are satisfied that having made addition of Rs.527.85 lakhs in the block assessment, the Assessing Officer 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 CIT VS. Wipro Finance Ltd. (supra) 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 under section 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.
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