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Hindustan Coca-Cola Marketing Pvt. Ltd. v. Cit
Factual and Procedural Background
This is an appeal filed by the assessee against an order dated 16.03.2011 passed by the Commissioner of Income Tax (CIT), Delhi IV, under Section 263 of the Income Tax Act, 1961. The CIT invoked Section 263 to revise an assessment by making a disallowance of advertisement-related expenditure of Rs. 377.30 lakhs as capital expenditure (rather than revenue expenditure). The CIT treated the expenditure as capital in nature, eligible for depreciation at 25%, resulting in a net capital amount of Rs. 282.99 lakhs (after depreciation) which the CIT held had been wrongly allowed as revenue expenditure by the Assessing Officer (AO).
The assessee challenged the validity of the CIT's order, arguing that the CIT erred in invoking Section 263. The assessee relied on earlier decisions in its own case for assessment years 2003-04 and 2004-05 (ITAT and Delhi High Court decisions) which had quashed orders passed under Section 263 on similar issues. The assessee had requested the CIT to postpone the Section 263 proceedings pending the outcome of the High Court decision in respect of AY 2003-04; the CIT refused citing time limitation for passing orders under Section 263.
The particulars of the advertisement and related expenditures identified by the CIT (as set out in the impugned order) were:
- POS Signs (Wall painting) - Rs. 36.80 lakhs
- Ice Chests - Rs. 115.83 lakhs
- Awnings - Rs. 27.18 lakhs
- Neon Signs - Rs. 0.22 lakhs
- Consumer promotion - Rs. 197.27 lakhs
- Total - Rs. 377.30 lakhs
The Tribunal considered the parties' submissions and several prior orders (including ITAT and Delhi High Court rulings in the assessee's own cases for AYs 2003-04 and 2004-05) before delivering its decision on 29 July 2011.
Legal Issues Presented
- Whether the Commissioner (CIT) properly exercised the revisional power under Section 263 of the Income Tax Act by treating the advertisement and related expenditures as capital expenditure and revising the assessment accordingly.
- Whether the CIT can substitute his judgment for that of the Assessing Officer when two plausible views exist on the characterisation of the expenditure (capital vs. revenue).
- Whether prior decisions of the ITAT and the Delhi High Court in the assessee's own earlier assessment years (2003-04 and 2004-05) preclude the CIT from exercising his revisional powers in the present year.
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The CIT erred in invoking Section 263 to disallow Rs. 377.30 lakhs of advertisement expenditure by treating it as capital expenditure; the AO's allowance of the expenditure was a plausible view.
- The net capital amount after depreciation (25%) was Rs. 282.99 lakhs and that classification should not have been altered by the CIT under Section 263.
- The assessee relied on earlier decisions in its own case: the ITAT's order dated 06.03.2009 (AY 2003-04) which quashed a Section 263 order, and the Delhi High Court decision dated 10.03.2011 upholding that ITAT order. The assessee argued that these decisions cover the present issue and therefore the CIT's order should be quashed.
- The assessee requested the CIT to postpone the Section 263 proceeding pending the High Court decision in the related matter, but the CIT refused citing statutory limitation for passing the revisional order.
- The assessee also placed reliance on ITAT and High Court orders for AY 2004-05 where similar Section 263 orders were quashed and those decisions were later upheld by the Delhi High Court (orders dated 30.10.2009 and 01.04.2011 respectively).
Respondent's (Revenue's) Arguments
- The record indicates only that the Department (DR) relied upon the order of the CIT to defend the impugned revision; the opinion records no further detailed submissions from the Department in the body of the Tribunal decision.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Assam Bengal Cement Co. Vs. CIT, 27 ITR 34 | Used by the CIT to support the proposition that certain expenditure (dealers' sign boards and glow signs) were capital in nature and failure to treat them as capital resulted in over-assessment. | The CIT relied on this Supreme Court authority in the impugned revisional order to justify characterization of the expenditure as capital. The Tribunal noted the CIT's reference but concluded that the CIT's order did not clearly rely on a failure of the AO to make enquiries, and therefore could not sustain revision on that basis. |
| Swarup Vegetable Products Industries Ltd. (High Court decision referred) | Supports the proposition that an order may be prima facie erroneous and prejudicial where the AO failed to make necessary enquiries before allowing large expenditures. | The Tribunal observed that this decision was cited as supporting the view that the assessment was prima facie erroneous, but ultimately held that the CIT had not shown that the ground of AO's failure to inquire was pleaded in the show cause notice; thus, the decision was not applicable to sustain the revision in that case. |
| Umashankar Rice Mill (High Court decision referred) | Similar support for the view that lack of enquiry by the AO can render an assessment prima facie erroneous and prejudicial to revenue. | The Tribunal mentioned this authority alongside Swarup Vegetable Products but found both inapplicable because the CIT's order did not explicitly rely on the AO's failure to examine the expenses in the show cause notice. |
| Smt. R.G. Umaranee (case cited) | Holds that an order of assessment cannot be revised on a ground which is not mentioned in the show cause notice issued for revision. | The Tribunal relied on this principle to conclude that the CIT could not revise the assessment on a ground (failure of AO to examine expenses) that was not clearly set out in the show cause notice. |
| Jagadhari Electric Supply Company (Punjab & Haryana High Court; cited) | Affirms the principle that grounds not mentioned in the show cause notice cannot be relied upon to revise an assessment. | The Tribunal cited this authority to support its conclusion that the CIT could not traverse beyond the grounds indicated in the show cause notice or the tenor of the revisional order. |
| Liberty Group Marketing Division (Punjab & Haryana High Court; cited) | Holds that glow sign boards do not create an asset nor lead to an advantage of enduring benefit, indicating that two views on the matter are possible. | The Tribunal cited this decision to demonstrate that there are competing judicial views and that the existence of two plausible views militates against revisional interference by the CIT where the AO has adopted one plausible view. |
| Malabar Industrial Co. Ltd. (Apex Court; cited) | Establishes the proposition that if a plausible view is taken by the AO, the CIT should not exercise the power under Section 263 to substitute his own view. | The Delhi High Court and the Tribunal invoked this principle to hold that where two views are possible and the AO adopted one plausible view, the CIT cannot exercise Section 263 merely because an alternative view exists. |
| Max India Ltd. (Apex Court; cited) | Same general principle as Malabar: plausibility of the AO's view limits the revisional power of the CIT under Section 263. | Applied by the Delhi High Court in upholding the Tribunal's conclusion that the CIT should not substitute judgment where the AO's view is plausible. |
| CIT Vs. Vimgi Investment P. Ltd., [2007] 290 ITR 505 (Delhi) | Reinforces the principle that once a plausible view is taken by the AO, it is not open to the CIT to exercise revisional powers under Section 263. | The Delhi High Court treated this authority as part of the line of cases supporting the conclusion that the CIT's exercise of power under Section 263 was not permissible when the AO had taken a plausible view. |
| ITAT order dated 06.03.2009 (ITA No. 2010/Del/2008) — (Assessee: AY 2003-04) | ITAT held that the CIT erred in revising the assessment under Section 263 where either the grounds were not properly the ones alleged or where two views were possible and the AO had taken a plausible view. | The Tribunal's earlier order quashed the CIT's Section 263 order for AY 2003-04; this ITAT decision was relied upon by the assessee in the present appeal and formed a primary basis for the Tribunal and later the Delhi High Court to reach the same conclusion. |
| Delhi High Court order dated 10.03.2011 in ITA No. 410/2010 (Assessee: AY 2003-04) | Held that where two views are possible and the AO has accepted a plausible view, the CIT cannot exercise Section 263 to substitute his judgment. | The Tribunal (in the present appeal) and the assessee relied on this High Court ruling. The Tribunal found the present facts not different from those in that case and applied the same ratio to cancel the CIT's Section 263 order. |
| ITAT order dated 30.10.2009 (Assessee: AY 2004-05) and Delhi High Court order dated 01.04.2011 in ITA Nos. 1526/2010 & 1531/2010 | ITAT quashed the CIT's Section 263 order for AY 2004-05; the Delhi High Court upheld the ITAT order. | The Tribunal in the present appeal treated these decisions as further authority that the assessee's position was covered by prior rulings and used them to support the conclusion that the CIT's revisional order for the present year was unjustified. |
Court's Reasoning and Analysis
The Tribunal proceeded by examining the material placed before it and the rival submissions. The key analytical points recorded in the opinion are:
- The Tribunal noted that the issue in the present appeal was squarely covered by two earlier decisions in the assessee's own cases (ITAT and Delhi High Court) for AY 2003-04 and AY 2004-05 where similar orders passed by the CIT under Section 263 had been quashed or upheld in favour of the assessee.
- In the ITAT decision for AY 2003-04 (06.03.2009), the Tribunal had observed that the AO had not raised queries nor discussed the expenditure in the assessment order; however, the Tribunal ultimately concluded the CIT's revisional order could not be sustained because the grounds relied upon (including any alleged failure of the AO) were not clearly pleaded in the show cause notice, and because two reasonable views were possible on whether the expenditure was capital or revenue.
- The Tribunal emphasized the legal principle—endorsed by higher courts—that where two views are possible and the AO adopts one plausible view, the CIT is not justified in invoking Section 263 merely to substitute his own judgment. The Tribunal cited decisions such as Malabar Industrial Co., Max India Ltd., and CIT v. Vimgi Investment P. Ltd. as supporting authorities for that proposition, and noted the Delhi High Court's application of that principle in upholding the ITAT's approach.
- The assessee had asked the CIT to postpone the Section 263 exercise pending the High Court's decision in the related matter; the CIT declined due to limitation concerns. The Tribunal observed that the High Court ultimately upheld the ITAT's decision in AY 2003-04, and that there was no suggestion that the facts in that case were materially different from the present year.
- Given the prior rulings in the assessee's favour and the absence of a justification to invoke Section 263 where the AO's view was plausible and competing views existed, the Tribunal found no justification for the CIT's invocation of revisional powers in the present case.
Holding and Implications
Holding: The Tribunal allowed the appeal filed by the assessee and canceled the order passed by the CIT under Section 263 in respect of the assessment year under consideration. The appeal was allowed and the impugned order under Section 263 was set aside. (Order pronounced on 29 July 2011.)
Implications:
- Direct effect: The CIT's revisional order under Section 263 disallowing Rs. 377.30 lakhs as capital expenditure (and treating it as capital) was quashed; the assessment as made by the AO stands to the extent affected by that disallowance.
- Reasoning basis: The Tribunal applied the ratio of earlier ITAT and Delhi High Court decisions in the assessee's own cases (AYs 2003-04 and 2004-05), emphasizing that where two views are possible and the AO has adopted a plausible view, the CIT should not exercise Section 263 merely to substitute his own view.
- Broader precedent: The judgment relied upon and applied prior ITAT and High Court rulings. The opinion does not purport to lay down a new legal principle beyond the application of existing authorities to the facts; no novel legal precedent was created in the text of this decision beyond applying those prior rulings to the present facts.
Order signatures: Sd/- (K.G. Bansal) Accountant Member; Sd/- (I.P. Bansal) Judicial Member. Order pronounced in open court on 29.7.11.
PER I.P. BANSAL, J.M. This is an appeal filed by the Assessee. It is directed against the order passed by ld. CIT Delhi IV, New Delhi dated 16.03.2011 u/s 263 of Income Tax Act, 1961 (Act).
2. In the present appeal the assessee has challenged the validity of impugned order. Though assessee has raised various grounds but the grievance of the assessee is that ld. CIT has erred in invoking the powers u/s 263 and the matter is covered in favour of assessee by the decision of Jurisdictional High Court in the case of assessee itself dated 10.03.2011 for A.Y. 2003-04. ITA No. 2625/D/2011 2
3. At the outset, it was submitted by ld. AR that ld. CIT has exercised power u/s 263 to make disallowance of Rs. 377.30 lakh incurred by the assessee as advertisement expenditure. He submitted that ld. CIT has held that the expenditure incurred by the assessee on advertisement are in the nature of capital expenditure, therefore, eligible for depreciation @ 25%. Therefore, net amount of Rs. 282.99 lakh (net of depreciation) is in the nature of capital which has been wrongly allowed as revenue expenditure. The assessee though has taken a plea before ld. CIT that on the same issue in respect of assessees case for A.Y. 2003-04 the ITAT had cancelled the order u/s 263 passed by CIT which was later on challenged by the department in the High Court and the said case was heard on 10.03.2011, therefore, till then the proceeding u/s 263 should be postponed. Ld. CIT has turned down such request of the assessee on the ground that there is a time limitation to pass order u/s 263. The details of expenditures have been described in the order of CIT and which is as under: -
(i) POS Signs (Wall painting) - Rs. 36.80 lacs
(ii) Ice Chests - Rs. 115.83 lacs
(iii)Awnings - Rs. 27.18 lacs
(iv) Neon Signs - Rs. 0.22 lacs
(v) Consumer promotion - Rs. 197.27 lacs Total Rs.377.30 lacs
4. He submitted that the copy of the Tribunal order in respect of A.Y. 2003-04 for which year also ld. CIT had invoked power u/s 263 is placed at pages 88 to 99 of the paper book the said order is dated 06.03.2009 ITA No. 2625/D/2011 3 passed in ITA No. 2010/Del/2008. The observations of the Tribunal while quashing the order u/s 263 were as under: -
3. We have considered the facts of the case and rival submissions. Before proceeding with the determination of the appeal, it may be mentioned that the assessee did not file any paper book and, thus, the show cause notice issued to it has not been placed on record. During the course of hearing, the learned DR placed on record the questionnaire dated 22.10.2005, issued by the AO in the course of assessment. From the questionnaire, it is clear that no query was raised regarding the expenditure under consideration. The learned DR had also filed a copy of assessment order. On perusal thereof, it is found that there is no discussion in the order regarding the expenses. Therefore, from the records of the Tribunal, it transpires that neither any query was raised with the assessee nor any discussion was made in the assessment order regarding the deductibility of the aforesaid expenditure. Therefore, the order is prima facie erroneous and prejudicial to the interest of revenue as expenditure of Rs. 490.91 lakh was allowed to be deducted without any enquiry whatsoever. This view finds support from the decision of Honble Allahabad High Court in the case of Swarup Vegetable Products Industries Ltd. (supra) and Honble Orissa High Court in the case of Umashankar Rice Mill (supra). The question, thus, before us is whether the CIT exercised her jurisdiction on the aforesaid ground or not? Unfortunately, in the absence of the questionnaire ITA No. 2625/D/2011 4 issued by her, the answer to this question has to be found out from the tenor of her order. Paragraph 1 of the order reads - From an examination of the income-tax assessment records of M/s Hindustan Coca Cola Marketing Company Pvt. Ltd., Abdul Faizal Road, Bengali Market, New Delhi for the A.Y. 2002-03, it transpired that in the assessment made vide order dated 14.03.2006 u/s 143(3), the deduction u/s 37(i) of expenditure being capital in nature has been wrongly allowed. While computing the business income a deduction of Rs. 490.91 lakhs (Rs. 124.80 lakhs towards Dealers Sign Boards and Rs. 366.11 lakhs towards Glow signs) included in administration, selling and distribution expenses has been allowed. These expenditure was related to an advantage being for enduring benefit in nature. The decision of Honble Supreme Court in case of Assam Bengal Cement Co. Vs. CIT 27 ITR 34 clearly applies failure to treat the expenditure as capital expenditure had resulted in over assessment and excess carry forward loss amounting to Rs. 490.91 lakh (unquote). On examination of this paragraph, it is seen that on perusal of the records it was found by her that a deduction of Rs. 490.91 lakh has been granted towards the expenditure incurred on dealers sign boards and glow signs, which ennured a benefit of enduring nature to the assessee and, therefore, it was capital expenditure. Therefore, the assessment resulted in over assessment of the loss by an amount of Rs. 490.91 lakh. Neither this paragraph nor paragraph no. 2, dealing with the merits of the case, mentions that the order was erroneous and ITA No. 2625/D/2011 5 prejudicial to the interest of revenue on account of failure of the AO to make any enquiry. In the case of Smt. R.G. Umaranee (supra), it was held that an order of assessment cannot be revised on a ground which is not mentioned in the show cause notice. Such was also the finding of Honble Punjab & Haryana High Court in the case of Jagadhari Electric Supply Company (supra). Therefore, in absence of any clear mention of the failure of the AO to examine the expenses, this issue could not have been made a ground for revision of the order. The Tribunal does not have powers to traverse beyond the show cause notice and the order of the CIT. In view thereof, it is held that on the facts and in the circumstances of this case, the decisions in the case of Swarup Vegetable Products Industries Ltd. and Umashankar Rice Mill (supra) are not applicable. The only ground, on which the order was revised, can be said to be that the expenditure was capital in nature, which was allowed as revenue expenditure by the AO. We have already discussed that the matter is a disputed one and rival decisions exist in this matter. In the case of Liberty group Marketing Division (supra), Honble Punjab & Haryana High Court held that glow sign boards do not bring into existence any asset nor lead to an advantage of enduring benefit to the assessee. Even if this case does not settle the issue in favour of the assessee, it can be said that two views are possible in the matter. In such circumstances, the CIT cannot substitute his judgment in place of the judgment of the AO and hold the order to be erroneous and ITA No. 2625/D/2011 6 prejudicial to the interest of the revenue. In this view of the matter, we are of the view that the ld. CIT erred in revising the order u/s 263(1) of the Act.
4. In the result, the appeal is allowed.
5. He further referred to the decision of Honble High Court vide which the aforementioned order of the Tribunal was upheld. The said order is dated 10.03.2011 in ITA No. 410/2010 and copy of which is placed at page 102 of the paper book and the observations of their lordships in that order are as under: - The assessee had filed its return for the AY 2003-04 declaring loss of Rs. 79,47,74,050/-. Assessment was carried out under the provisions of Sec. 143(3) of the Income-Tax Act and was completed by the AO at a loss of Rs. 35,59,74,060/-. The matter was thereafter taken up by the CIT(A) who passed orders dated 31.3.2008 in exercise of power u/s 263 of the Act. According to him, the assessee had claimed the deduction of Rs. 490.91 lacs comprising of expenditure towards dealer sings boards and also administration, selling and distribution expenses. The Commissioner was of the opinion that these expenses were capital in nature as they were incurred for enduring benefit and the AO has wrongly allowed the same u/s 37(i) of the Act. This order of the Commissioner was challenged by the assessee by preferring appeal before the Tribunal and the Tribunal has set aside the said order vide impugned decision dated 6.3.2009 inter alia, on the ground that in the matter like this two views were possible and, therefore, it was not permissible for the ITA No. 2625/D/2011 7 CIT(A) to substitute his judgment in place of the judgment of the AO and hold the order to be erroneous and prejudicial to the interest of the Revenue. Under similar circumstances, in the case of this very assessee the Commissioner had passed orders u/s
263 of the Act, albeit on the issue of depreciation which arose in that case and the said order was set aside by the ITAT. Appeals there against i.e. ITA 1391/2010, 1394/2010 and 1396/2010 have been dismissed by this Court vide its details judgment dated 14th January, 2011, inter alia, observing as under: - Regard being had to the wider expansion of the definition after the amendment of Section 32 by the Finance Act (2) 1998 and the auditors report and the explanation offered before the AO, we are of the considered opinion that the Tribunal is justified in holding that if two views were possible and when the AO had accepted one view which is plausible one, it was not appropriate on the part of the Commissioner to exercise his power u/s 263 solely on the ground that in the books of accounts it was mentioned as goodwill and nothing else. As has been held by the Apex Court in Malabar Industrial Co. Ltd. (supra), Max India Ltd. (supra) and CIT Vs. Vimgi Investment P. Ltd. [2007] 290 ITR 505 (Delhi) once a plausible view is taken, it is not open to the Commissioner to exercise the power u/s 263 of the Act. Following the aforesaid judgment, we are of the view that no question of law arises for consideration. This appeal is accordingly dismissed. ITA No. 2625/D/2011 8
6. Ld. AR further referred to the decision of the Tribunal in the case of the assessee itself in respect of A.Y. 2004-05 coy of which is placed at pages 103 to 108 of the paper book in which also similar powers were exercised by ld. CIT and the order u/s 263 was quashed by the Tribunal vide its order dated 30.10.2009. It was further submitted that the said order of the Tribunal has been upheld by the Honble Delhi High Court vide its decision dated 1.04.2011 in ITA Nos. 1526/2010 and 1531/2010 and copy of such order is placed at pages 109 & 110 of the paper book.
7. In view of above discussion, it was the submission of ld. AR that the issue raised by assessee is covered in favour of assessee and, therefore, the order passed by CIT u/s 263 should be quashed.
8. On the other hand, ld. DR relying upon the order of ld. CIT.
9. We have carefully considered the rival submission in the light of material placed before us. The issue is squarely covered by the aforementioned two decisions of ITAT & Honble Delhi High Court in respect of assessees own case for assessment years 2003-04 & 2004-
05. It was submitted by the assessee before ld. CIT that the matter has already been heard and decision of Delhi High Court is awaited. However, such request of assessee has been turned down by ld. CIT on the ground that limitation is involved to pass order u/s 263. However, later on Honble Delhi High Court has upheld the order of Tribunal in respect of A.Y. 2003-04. It is not the case of ld. CIT that the facts of that ITA No. 2625/D/2011 9 case are in any way different from the facts of the present year. Therefore, applying the same ratio we find no justification for invocation of power u/s 263. Therefore, we cancel the order passed u/s 263 and allow the appeal filed by the assessee.
10. In the result, the appeal filed by the assessee is allowed. Order pronounced in the Open Court on 29th July, 2011. Sd/- Sd/- (K.G. BANSAL) (I.P. BANSAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 29.7.11 *Kavita Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT TRUE COPY By Order, DEPUTY REGISTRAR
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