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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
CIVIL APPELLATE JURISDICTION
WRIT PETITION NO.8721 OF 2009
Multiscreen Media Private Limited, )
a company incorporated under the Companies )
Act, 1956 having their office at Interface Building )
7, 4th floor, Off. Malad Link Road, Malad (West), )
Mumbai- 400064. )..Petitioner.
V/s.
1. The Union of India, Through the Secretary )
Ministry of Finance, Government of India )
North Block,New Delhi-110 101.
ig )
)
2. The Assistant Commissioner of Income-Tax )
Range 11(1), Aayakar Bhavan, Maharishi )
Karve Marg, Mumbai - 400 020. )..Respondents.
Mr. Percy J. Pardiwala, senior Advocate with Prakash Shah & Sumeet
Raghani i/b. PDS Legal for petitioner
Mr. Vimal Gupta for respondents.
CORAM : DR. D.Y.CHANDRACHUD
AND J.P.DEVADHAR, JJ.
DATED : 17TH FEBRUARY, 2010
JUDGMENT (PER DR. D.Y. CHANDRACHUD, J.)
1) Rule, by consent and on the request of Counsel made
returnable forthwith. Counsel for the respondents waives service. With the
consent of counsel, the petition is taken up for final hearing.
2) The petitioner is engaged inter alia in the business of providing
audiovisual television Software (‘content’), films, events and other like
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activities. Subscription income is received from distribution of channels. The
petitioner also receives income from advertisements, sales and agency fees
from marketing of airtime. As a content provider, the petitioner develops the
content in-house or gets it developed from other software production houses
under its supervision and control. The major source of income is stated to be
the subscription income received by the petitioner for the distribution of
television channels. The petitioner also acts as an agent for foreign
television companies for canvassing the sale of airtime for channels for
which it receives agency fees.
3) The bone of contention in the present case relates to the
reopening of assessment for assessment year 2004-05. For assessment
year 2004-05, the petitioner claimed a deduction in respect of certain
expenditure pertaining to advertisements, sales promotion, market research
and publicity expenses on the ground that it was wholly and exclusively
incurred for the purpose of business under Section 37(1) of the Income Tax
Act, 1961. The return of income for assessment year 2004-05 was taken up
for scrutiny assessment. The assessment proceedings were concluded on
22nd December, 2006. The Assessing Office allowed to the petitioner a
deduction on account of expenditure incurred towards advertisements,
publicity and market research.
4) On 25th March, 2009 the Assessing Officer issued a notice
under Section 148 proposing to reopen the assessment proceedings for
assessment year 2004-05 on the ground that he had reason to believe that
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the income of the petitioner chargeable to tax had escaped assessment. On
8th July, 2009, the Assessing Officer communicated his reasons for
reopening the assessment. The reasons recorded by the Assessing Officer
state that during the course of assessment proceedings of the subsequent
assessment year, 2005-06, the Assessing Officer had made a specific
addition under the head of advertisements, sales promotion and market
research expenses, wherein an amount of Rs.32.49 crores was added back
to the income of the assessee. The reasons which have been recorded by
the Assessing Officer while reopening the assessment for assessment
2005-06 have been adverted to. The Assessing officer on the reasons
recorded for the subsequent assessment year held that a similar issue in
regard to advertisement and publicity expenses is raised in assessment year
2004-05. During the assessment year, the petitioner debited an amount of
Rs.26,75 crores under the head of advertisement and publicity expenses, Rs.
2.83 crores for market research expenses and Rs.6.42 crores to dealer’s
incentives. Consequently, selling and distribution charges amounting in all to
Rs.26.01 crores had been debited. During the course of scrutiny
assessment, since the assessee had not made any specific representation in
that regard, the Assessing Officer had no occasion to take any opinion on
whether a disallowance was called for. The Assessing Officer recorded that
expenses amounting to 81.25% of the aforesaid sum debited need to be
disallowed in accordance with the findings of the Assessing Officer for
assessment year 2005-06. On this basis, he formed a reason to believe, that
taxable income of the assessee had escaped assessment and reopened the
assessment under Section 147.
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5) Learned counsel appearing on behalf of the petitioner in support
of the challenge to the validity of the notice under Section 148, submitted that
during the course of scrutiny assessment, a query was raised by the
Assessing Officer on 7th September, 2006 by which the petitioner was called
upon to disclose the nature of the business and details of expenses debited
inter alia towards market research. In pursuance thereto, the petitioner
submitted a reply on 22nd November, 2006 explaining the nature of its
business and furnished a break-up of market research expenses.
Thereupon, by a communication dated 15th November, 2006, the Assessing
Officer called upon the assessee to furnish details / break-up of
advertisement and sales promotion expenses together with a justification for
the claim. This was replied to by the petitioner on 29th November, 2006.
The petitioner submitted that it incurred the advertisements and sales
promotion expenses in the normal course of its business of, inter alia,
distribution of TV channels and canvasing for airtime of TV channels in India.
These expenses were with a view to increase the turnover of the company
which in turn has increased its profitability. On the basis of this material, it
was submitted that an order of assessment was passed under section
143(3). The Assessing Officer was, therefore, not within his jurisdiction to
issue a notice of reassessment under Section 148 on the basis of the same
facts. Undoubtedly, the Assessing Officer had for assessment year 2005-06
made a disallowance of the expenditure incurred on advertisements and
sales promotion, save and except to the extent of 18.75% but this would not
justify the Assessing Officer in seeking to reopen assessment for assessment
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year 2004-05, there being no fresh material for the Assessing Officer to do
so. In the absence of fresh material, it is urged that the action of the
Assessing Officer would only amount to a change of opinion, which is not
permissible under the substantive provisions of Section 147.
6) Section 147 enables the Assessing Officer to assess or
reassess any income chargeable to tax which he has reason to believe has
escaped assessment for an assessment year. The proviso to Section 147
imposes certain additional requirements where an assessment inter alia is
sought to be opened beyond a period of four years from the end of the
relevant assessment year. In the present case, the exercise of power is
within a period of four years and, therefore, the requirements of the proviso
are not attracted. Explanation 2 to Section 147 provides a deeming fiction of
cases were income chargeable to tax would be treated to have escaped
assessment. Among them in clause (c) of Explanation 2 are cases where an
assessment has been made, but (i) income chargeable to tax has been
under-assessed; or (ii) such income has been assessed at too low a rate; or
(iii) such income has been made the subject of excessive relief under the Act;
or (iv) excessive loss or depreciation allowance or any other allowance under
the Act has been computed. Where the Assessing Officer purports to
exercise power under Section 147 within a period of four years of the end of
the relevant assessment year, the condition precedent to the exercise of the
power, is the existence of a reason to believe that any income chargeable to
tax has escaped assessment. The expression ‘reason to believe’ must
obviously be that of a prudent person and it is on the basis of the reasons
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recorded by the Assessing Officer that the question as to whether there was
a reason to believe that income has escaped assessment, has to be
determined. At the same time, the sufficiency of the reasons for reopening
an assessment does not fall for determination, at the stage of a reopening of
assessment. When the Court is concerned with a challenge to a notice
under section 148, the issue is not as to whether it can be conclusively
demonstrated that income had escaped assessment, but whether as a matter
of fact, there was a reason to believe that this was so, to justify a recourse to
the power under Section 147. The power under section 147 cannot be
exercised on a mere change of opinion. The requirement that reasons be
recorded in Section 148 is a safeguard that ensures against an arbitrary
exercise of power. Similarly, judicially evolved doctrine asserts that a mere
change of opinion cannot justify recourse to the power under Section 147.
This is intended to ensure that the power is exercised for valid reasons when
there is tangible material for the Assessing Officer to do so. The test of
‘tangible material’, it may be noted, has been enunciated in a judgment of the
Supreme Court in Commissioner of Income Tax V/s. Kelvinator of India
Ltd.1, wherein the Hon’ble Mr. Justice S.H. Kapadia, speaking for a Bench of
the Supreme Court held thus :-
” …one needs to give a schematic interpretation to the words “reason
to believe” failing which, we are afraid, section 147 would give
arbitrary powers to the Assessing Officer to reopen assessments on
the basis of “mere change of opinion”, which cannot be per se reason
to reopen. We must also keep in mind the conceptual difference
between power to review and power to reassess. But reassessment
has to be based on fulfilment of certain pre-conditions and if the
concept of “change of opinion” is removed, as contended on behalf of
the Department, then, in the garb of reopening the assessment, review1 [2010] 320 ITR 561 (SC)
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7would take place. One must treat the concept of “change of opinion”
as an in-built test to check abuse of power by the Assessing Officer.
Hence, after 1st April, 1989, the Assessing Officer has power toreopen, provided there is “tangible material” to come to the conclusion
that there is escapement of income from assessment. Reasons must
have a link with the formation of the belief…. ”
7) In the present case, recourse to the provisions of Section 147
has been taken on the ground that during the course of assessment
proceedings for the next assessment year, namely assessment year
2005-06, the Assessing Officer specifically made a disallowance in respect of
a part of the expenditure claimed to have been incurred by the assessee
towards advertisements and publicity expenses. The Assessing Officer while
seeking to reopen an assessment under Section 147 is not precluded upon
relying on an order of assessment passed for a subsequent assessment
year, where additional material has emerged before the Assessing Officer to
lead to the formation of a belief that income chargeable to tax had escaped
assessment. In Srikrishna Pvt. Ltd. V/s. Income Tax Officer2, in his return
of income filed for assessment year 1959-60, the Assessee had shown
certain Hundi loans which were stated to have been taken from a number of
persons. The Assessing Officer accepted the averment and made an
assessment. During assessment proceedings for the successive year,
1960-61, the assessee again showed Hundi loans in a sum exceeding Rs.17
lacs. The Assessing Officer made an inquiry and found that many of the
loans were bogus and that some of the alleged loans were by erstwhile
directors and shareholders of the assessee. Loans of approximately Rs.
11.15 lacs were not established to be genuine and the amount was added
2 221 ITR 538
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back as income from undisclosed sources. On that basis, notice was issued
under Section 148 seeking to reassess the income for assessment year
1959-60. A Single Judge of the Calcutta High Court allowed the petition filed
by the assessee and quashed the validity of the notice, but on appeal, the
Division Bench set aside the judgment of the Single Judge. The Supreme
Court confirmed the judgment of the Division Bench of the Calcutta High
Court. The Supreme Court held that at that stage it was only a reopening of
an assessment and while it was true that the Assessing Officer could have
investigated the truth of the assertion of the assessee, which he actually did
in the subsequent assessment year, the question as to whether the loan
alleged to have been taken by the assessee was true or false, was a material
fact and not a mere inference to be drawn from given facts. The Supreme
Court held that this would furnish a reasonable ground to the Assessing
Officer to form a belief that on account of the failure of the assessee to
disclose all material facts, income had escaped assessment. The Court
emphasised that at that stage, it was only required to consider whether there
are reasonable grounds for the Assessing Officer to believe and not whether
escapement of income had been established. In a subsequent judgment of
the Supreme Court in Ess Ess Kay Engineering Co. P. Ltd. V/s.
Commissioner of Income Tax3, which was a Civil Appeal from the judgment
of the Punjab & Haryana High Court in an Income Tax Reference, the
Supreme Court held that there was material on the basis of which the
Assessing Officer can proceed to reopen the case and it was not a case of a
mere change of opinion. Merely because the case of the assessee was
accepted as correct in the original assessment for the assessment year in
3 (2001) 248 I.T.R. 818
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question, that would not preclude the Income Tax Officer to reopen the
assessment for an earlier year on the basis of a finding of fact made on the
basis of fresh material in the course of an assessment for the next
assessment year. The judgment in Ess Ess Kay Engineering (supra) hence
lays down the principle of law that it would be open to the Assessing Officer
to reopen an assessment, based on a finding of fact made on the basis of
fresh material gathered in the course of assessment for a subsequent
assessment year. The test in these cases, as the subsequent judgment in
Kelvinator (supra) lays down is whether there is tangible material for the
Assessing Officer to do so.
8) In a judgment of a Division Bench of this Court in Anusandhan
Investments Ltd. V/s. M.R. Singh, Deputy Commissioner of Income Tax4,
one of us (Mr. Justice J.P. Devadhar) speaking for a Division Bench noted
that it is a well established position in law that an assessment can be
reopened on the basis of information contained in an assessment of a
subsequent year. In that case, the question was whether reopening of
assessment for assessment year 1992-93 was justified. In the assessment
order for assessment year 1993-94, the Assessing Officer held that the sale
of shares in pursuance to an agreement dated 3rd January, 1992 took place
on the same day and capital gains in respect thereof were leviable for
assessment year 1992-93. The issue regarding capital gains arising from
the sale of shares pursuant to the agreement was however neither raised nor
discussed in the assessment order for assessment year 1992-93.
Consequently reopening of assessment based on assessment year 1993-94,
4 [2006] 287 I.T.R. 482 (Bom)
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wherein it was held that a relationship of a 100 per cent holding subsidiary
company was acquired only with the intention of evading capital gains could
not be faulted.
9) In the judgment of a Division Bench of this Court in Siemens
Information System Ltd. V/s. Assistant Commissioner of Income Tax &
Ors.5, an assessment was sought to be reopened for assessment year
2001-02 on the basis of an assessment order that was passed for
assessment year 2003-04. The Division Bench noted that the reason to
believe that income had escaped assessment was based on the finding that
losses incurred in units which were not eligible for deduction under Sections
10A & 10B had to be first set off against the profits of the units which are
eligible for deduction and only the balance profits were eligible for deduction
under Section 10A. The Division Bench held that while furnishing those
reasons, the Assessing Officer had in assessment year 2003-04 merely
disagreed with the approach of the Assessing Officer who made an
assessment for assessment year 2001-02. The Division Bench clarified that
this was not a case where any other material had been disclosed or where
new material had come to attention or where this Court or the Supreme Court
had taken a view on the issue. The Division Bench held that merely because
the second Assessing Officer differs with the opinion of the earlier Assessing
Officer on the interpretation of the statutory provision without any additional
material, that would not justify recourse to the provisions of Section 147 and
a mere change of opinion on an interpretation of a provision by itself without
anything more, cannot give rise to ‘reason to believe’. The judgment of the
5 (2007) 295 I.T.R. 333 (Bom.)
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Division Bench in Siemens Information Ltd. (supra), therefore, does not state
as an absolute principle of law that an Assessing Officer would not be entitled
to seek recourse to the power to reopen an assessment under Section 147
on the basis of an assessment made for a subsequent assessment year,
The judgment of the Division Bench cannot be construed to lay down a
proposition of law inconsistent with the law down by the Supreme Court in Sri
krishna Pvt. Ltd. (supra) and Ess Ess Kay Engineering (supra). In fact, as
already noted earlier, the judgment in Ess Ess Kay Engineering held that the
Assessing Officer is not precluded from reopening the assessment of an
earlier assessment year on the basis of his finding of fact made, on the basis
of fresh material in the course of an assessment in the next assessment year.
The judgment of the Division bench in Siemens Information (supra) when
properly considered, involved a case where recourse to the provision for
reopening an assessment was taken in the absence of any additional
material. The Supreme Court in Kelvinator (supra) observed that tangible
material and not merely a change of opinion can entitle the Assessing Officer
to take recourse to the power to reopen assessment. The emphasis is on
‘mere’ in the phrase ‘mere change of opinion’. A mere change of opinion is
not enough. A change of opinion, in other words, is permissible, provided it is
grounded on additional or tangible material. In the absence of any other
fresh material, a change of opinion would amount to an exercise of a power
akin to a review or re-appreciation and would be no more that what is
described as a mere change of opinion.
10) In this background, the facts of the present case would have to
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be considered. During the course of proceedings for assessment year
2004-05, a query was addressed by the Assessing Officer on 7th September,
2006 inter alia requiring the assessee to make a disclosure of the nature of
its business and details of the expenses towards market research. On 15th
November, 2006, the assessee was directed to furnish a justification and
details of expenditure towards advertisements and sales promotion
expenses. The assessee furnished the break-up of the expenses incurred
towards advertisements and sales promotion and an order of assessment
was passed under Section 143(3). When the assessment proceedings for
assessment year 2005-06 were taken up, the Assessing Officer by his letter
dated 21st August, 2007 called up the assessee to furnish the ledger extracts
of advertisements and sales promotion expenses / market research
expenses. On 26th November, 2008 a notice was issued to the assessee
under Section 142(1). The Annexure to the notice drew the attention of the
assessee to the fact that the assessee had debited advertisements and sales
promotion expenses of Rs.39.99 crores; dealer’s incentives of Rs.50.89
crores and market research expenses of Rs.2.73 crores. The Assessing
Officer noted that considering the fact that the programmes are aired by the
channel, any ‘upside’ in the revenues shall accrue to the Channel Company.
The assessee was asked to explain why this amount should be allowed in
the light of the absence of business expediency. The assessee was called
upon to file a detailed explanation along with supporting documents. In the
course of the assessment proceedings for assessment year 2005-06, the
assessee had filed a detailed explanation before the Assessing Officer on
11/12/2008. The assessee set out its case in regard to the allowability of its
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advertisements and sales promotion expenses and dealer’s incentives
expenses together with market research expenses under section 37(1). The
case of the assessee was that the entire expenses were incurred wholly and
exclusively for the purpose of its business and it was essential for the
assessee to incur the expenses so as to increase its own income by way of
sale of content, distribution income, advertisements as well as agency fees.
The case of the assessee, therefore, was that the entire expenditure should
be allowed as deduction under Section 37(1) even though a third party,
namely a Channel Company may have benefited from the same to a certain
extent. The Assessing officer while passing the order of assessment for
assessment year 2005-06 came to the conclusion after considering the
submissions of the assessee that of the total expenses that were incurred,
18.75% would be allowed in the hands of the assessee while the balance
shall be held as expenditure incurred on the behalf of the foreign principal of
the assessee and was liable to be disallowed in the hands of the assessee.
In the present case, we are not concerned with the merits of the claim of the
assessee in regard to whether the expenditure that was incurred was wholly
and exclusively for the purpose of the business of the assessee. What is
material is that on the basis of a detailed inquiry which took place during the
course of assessment year 2005-06, the claim of the assessee of deduction
of the entire expenses was not accepted and disallowance was made to the
extent of expenditure incurred over and above 18.75%. The Assessing
Officer did so on the basis of fresh material which came before him in view of
the notice dated 26th November, 2008 in pursuance to which the assessee
filed a detailed representation elucidating the relevant particulars of the
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business of the assessee and the reasons for the expenditure. Whether the
Assessing Officer was justified in the decision which he took for assessment
year 2005-06 is again not a matter to be considered at this stage of the
proceedings. The point is that on the basis of the additional material which
was available on record, the Assessing officer issued a notice for reopening
the assessment for assessment year 2004-05. In our considered view, the
Assessing officer did have tangible material to reopen the assessment under
Section 147 of the Act and to form a reason to believe that income had
escaped assessment. Clause (iv) (c) of Explanation 2 to Section 147 creates
a deeming fiction where though the assessment has been made, income
chargeable to tax is under assessed. In such a case, law deems that income
chargeable to tax has escaped assessment. For these reasons, we are of
the view that recourse to the provisions of Section 147 cannot be faulted.
11) While concluding, we would however reiterate that the question
as to whether the assessee would be entitled to a deduction in respect of the
entire expenses claimed under Section 37(1) would be a matter which would
fall for determination on merits according to law and the observations
contained in this judgment should not be considered as an expression of any
opinion on the merits of that issue.
12) For all the aforesaid reasons, we are of the view that the
exercise of writ jurisdiction would not be warranted. The petition is dismissed.
There shall be no order as to costs.
(J.P.DEVADHAR, J.) (DR. D.Y.CHANDRACHUD, J.)
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