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Case Number

ITA Nos. 588 & 589(Mum)/2005, (Assessment Years: 1998-99 & 1999-2000) and ITA Nos. 741 & 742 (Mum)/2005, (Assessment Years: 1998-99 & 1999-2000)

Advocates

Assessee by: Mr. S.E Dastur
Department by: Mr. Hemant J. Lal

Judges

P.M Jagtap, A.M
V. Durga Rao, J.M

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Smart Summary

Consolidated Tribunal Order: ITA Nos. 588, 589, 741 & 742 (Mum) 2005

Factual and Procedural Background

These are consolidated cross-appeals filed by the assessee and the Revenue against separate orders of the CIT(A), Central - II, Mumbai dated 17.11.2004 for Assessment Years 1998-1999 and 1999-2000. The appeals were heard together and disposed of by a consolidated order. The assessee was represented by Mr. S.E. Dastur and the Departmental Representative was Mr. Hemant J. Lal. The principal contested matters included:

Challenge to the initiation of reassessment proceedings;
Disallowance of advertisement expenses (amounts differ by year);
Additional grounds including disallowance of depreciation on building (alleged inclusion of land component) and certain monetary additions for prior/personal/interest items.

Legal Issues Presented

Whether the initiation of reassessment proceedings was valid (challenged by the assessee).
Whether the Assessing Officer/CIT(A) correctly disallowed/partly disallowed advertisement expenses incurred by the assessee (specific disputed amounts for AY 1998-99 and AY 1999-2000).
Whether depreciation on building should be disallowed on the ground that it includes a component of land (additional ground admitted for consideration).
Whether certain monetary additions (prior years/personal/interest) could be entertained at the appellate stage when not raised before AO or CIT(A) (Revenue/assessee additional grounds).
Revenue's contentions: whether the CIT(A) erred in reducing the advertisement addition, whether the assessee was entitled to full reimbursement under contract terms, and whether the AO's apportionment formula (based on contract) should have been accepted.

Arguments of the Parties

Assessee's Arguments

The assessee's counsel conceded that the issue of initiation of reassessment was covered by the Tribunal's decision in the assessee's own case for Assessment Year 1997-1998 (ITA No. 587.Mum/2005 dated 14.05.2009) and relied on that decision.
The assessee contended that the advertisement expenses were wholly and exclusively for its business and that the Tribunal's earlier decision deleting the disallowance for AY 1997-1998 applied to the present years as facts were similar.

Revenue's (Departmental Representative) Arguments

The Revenue argued that expenses borne by the assessee benefited Jyothi Laboratories Ltd. (JLL), which was eligible for 80-IB, and that the assessee had used a colourable device to increase JLL's profits — therefore the expenses related to JLL's business and not solely to the assessee.
The Revenue contended that the expenses should be treated as income accruing to the assessee at the time of incurring the expenditure and cited the Bombay High Court judgment in Vodafone International Holdings B.V v. Union of India (311 ITR 46).
The Revenue relied on the Assessing Officer's interpretation of clause 16 of the agreement between the assessee and JLL to support the view that the assessee had a right to reimbursement and that such right caused accrual of income.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Tribunal — ITA No. 587.Mum/2005 (assessee's own case relating to AY 1997-1998) (order dated 14.05.2009)	Held initiation of reassessment valid where two additions/disallowances (depreciation on land, interest on income tax refund) were accepted by the assessee; deleted disallowance of advertisement expenses for that year.	The Tribunal in the present consolidated order respectfully followed the co-ordinate bench decision in the assessee's own case: (a) confirmed validity of reassessment initiation; and (b) deleted the disallowance of advertisement expenses for the years under appeal.
Sassoon J. David & Co. Pvt. Ltd. v. CIT (1979) 118 ITR 261 (SC)	Authority for the proposition that expenditure, if incurred "wholly and exclusively" for the purposes of business, is allowable even if some benefit flows to others.	The Tribunal relied on this Supreme Court authority to support the conclusion that the advertisement expenditure was wholly and exclusively for the assessee's business and thus allowable.
E.D. Sassoon & Company Ltd. v. CIT (1954) 26 ITR 27 (SC)	Principle on accrual of income under the mercantile system: income is taxed when the right to receive it vests, even if actual receipt is deferred.	The Tribunal applied this principle in its analysis of whether reimbursement from JLL had accrued as income to the assessee; it concluded accrual depends on determination of right and relevant contractual terms.
Morvi Industries Ltd. v. CIT (1971) 82 ITR 835 (SC)	Cited by Revenue to support the contention that income had accrued to the assessee at the time the advertisement expenditure was incurred on behalf of JLL.	The Tribunal considered this authority but concluded, on the facts, there was no material to show that amounts in excess of Rs. 55.86 lakhs had been determined as due from JLL; therefore the larger hypothetical accrual advanced by Revenue was not sustainable.
Vodafone International Holdings B.V v. Union of India (311 ITR 46)	Cited by the Departmental Representative in support of the Revenue's position on the tax consequences/characterization of certain transactions.	The Tribunal/Court in the present order held that the Vodafone decision did not apply to the present case because the facts were different.

Court's Reasoning and Analysis

The Tribunal's reasoning proceeded by reference to prior decisions and a careful comparison of facts.

Reassessment issue: The Tribunal observed that the initiation of reassessment was covered by the Tribunal's earlier decision in the assessee's own case for AY 1997-1998 (ITA No. 587.Mum/2005). In that prior order the co-ordinate bench had held that because two additions/disallowances (depreciation on land and interest on income tax refund) were accepted by the assessee, initiation of reassessment proceedings was valid. The present Tribunal therefore confirmed the actions of the lower authorities and dismissed the grounds of appeal by the assessee that challenged reassessment initiation.
Advertisement expenses: The Tribunal examined the contention that the advertisement expenditure was not wholly and exclusively for the assessee because JLL also benefited. Relying on the principle in Sassoon J. David & Co. (SC), the Tribunal held that an expense incurred wholly and exclusively for the purposes of the assessee's business should be allowed even if a benefit flowed to another party. The Tribunal noted that revenue did not impugn the genuineness of the expenditure nor assert that the agreement with JLL was a sham. Accordingly, the Tribunal concluded the advertisement expenditure was wholly and exclusively for the assessee's business.
Accrual/reimbursement aspect: The Tribunal considered the Revenue's argument that the assessee had an accruable right to reimbursement from JLL and that this gave rise to taxable income at the time of incurring the expenditure (applying mercantile principles and authorities such as E.D. Sassoon & Co. and Morvi Industries). The Tribunal analysed the contractual provisions (clause 16) and the factual materials and found no material to suggest that any amount beyond Rs. 55.86 lakhs had been determined as due from JLL. It rejected a hypothetical exercise to treat Rs. 527.85 lakhs as having accrued to the assessee. On that basis the Tribunal concluded that the CIT(A)'s partial addition was erroneous and ordered deletion of the addition.
Additional grounds (depreciation on building): The Tribunal treated the contention that depreciation was disallowed because a land component was included as a legal issue and admitted it for consideration. However, to allow the Revenue an opportunity to verify facts, the Tribunal restored this issue to the file of the Assessing Officer with directions to consider and decide the matter on merits in accordance with law (allowed for statistical purpose).
Other additional grounds (monetary additions): The Tribunal observed these were purely factual and had not been raised before the AO or CIT(A); therefore they could not be entertained at the appellate stage and were declined admission.
Revenue appeals: The Tribunal noted that the Revenue's points (regarding reduction of advertisement addition, entitlement to full reimbursement, and AO's apportionment formula) had been considered and decided against the Revenue in the assessee's own earlier case (AY 1997-1998). Respectfully following that co-ordinate bench ratio, the Tribunal decided the revenue appeals against the Revenue and dismissed them.

Holding and Implications

Holding: The Tribunal made the following dispositive orders:

Assessee appeals (ITA Nos. 588 & 589.Mum/2005) — partly allowed. Specifically:
- The challenge to initiation of reassessment was dismissed (reassessment held valid by following co-ordinate bench decision).
- The disallowance (partial or whole) of advertisement expenses was deleted in favour of the assessee and that ground was allowed.
- The legal ground on disallowance of depreciation (alleged land component) was admitted and restored to the AO for fresh consideration (allowed for statistical purpose).
- Other additional factual grounds (monetary additions) were not admitted.
Revenue appeals (ITA Nos. 741 & 742.Mum/2005) — dismissed. The Tribunal followed the earlier co-ordinate bench decision in the assessee's own case and decided the issues against the Revenue.

Implications:

Direct effect: The assessee obtains relief in respect of the advertisement expense disallowances for AYs 1998-1999 and 1999-2000; reassessment initiation challenges fail; one legal issue (depreciation on building) is remitted to the AO for fresh consideration. Revenue's appeals on the advertisement expenses were dismissed.
Precedential impact: The Tribunal expressly followed and applied the co-ordinate bench's earlier decision in the assessee's own case (AY 1997-1998). The order does not purport to create a new binding precedent beyond the application of existing co-ordinate-bench reasoning to the present facts.

This summary is strictly based on the content of the provided opinion and does not add or infer information beyond that text.

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M.P. Ramachandran, Ujala House, Ramakrishna Mandir Road, Kandivita Lane, Andheri (East), Mumbai - 400059 v. Dcit, Central Circle - 8, Mumbai

Mr. V. Durga Rao, J.M:— These cross-appeals filed by the assessee and revenue are against the separate orders of CIT (A), Central - II, Mumbai, both dated 17.11.2004 for the Assessment Years 1998-1999 & 1999-2000. All the appeals were heard together and are being disposed off by this consolidated order for the sake of convenience.

ITA No. 588 & 589(Mum)2005 (Assessee's appeals for assessment years 1998-1999 & 1999-2000):

2. Mr. S.E Dastur, the learned counsel appeared for the assessee and Mr. Hemant J. Lal, Departmental Representative appeared for the Revenue and put forward their rival contentions.

3. Though the assessee has raised ground Nos. 1 to 4 in both the appeals, the only issue involved in these grounds is against the initiation of reassessment.

4. The learned counsel for the assessee at the outset fairly submitted that the issue involved in the above grounds is covered by the decision of the Tribunal in assessee's own case relating to the Assessment Year 1997-1998. The learned DR relied on the orders of the authorities below.

5. We have heard the rival submissions and perused the records. From the perusal of records, we find that the issue is squarely covered by the decision of the Tribunal in assessee's own case in ITA No. 587.Mum/2005 relating to the Assessment Year 1997-1998, wherein after deliberating upon the issue at length vide order dated 14.05.2009, the co-ordinate bench of the Tribunal held that ‘Since the two additions/disallowances quo 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 regard is dismissed’. Since, the facts and circumstances of the issue before us are similar to the facts and circumstances of the issue decided by the Tribunal in the own case of the assessee relating to the earlier assessment year, respectfully Mr. M.P Ramachandran following the decision of the co-ordinate bench of the Tribunal, we confirm the actions of the authorities below and the grounds of appeal Nos. 1 to 4 raised by the assessee in both the appeals is dismissed.

6. The ground No. 5 raised by the assessee in both the appeals is as under:

“5. The learned AO had erred in law in disallowing the advertisement expenses to the extent of Rs. 85,568,000/- (in A.Y 1998-1999)/Rs. 144,995,000/- (in A.Y 1999-2000). Consequently, the learned CIT (A)-II has also erred in law in partly upholding the disallowing on account of advertisement expenses amounting to Rs. 55,220,293/- (in A.Y 1998-1999)/Rs. 70,175,000/- (in A.Y 1999-2000).”

The learned counsel for the assessee submitted that the issue involved in this appeal is squarely covered by the assessee's case in ITA Nos. 587.Mum/2005 dated 14th May 2009 for assessment year 1997-1998. Learned DR fairly conceded that the facts in the instant case are similar to the one decided by the Tribunal for assessment year 1997-1998. However, he submitted that the expenses pertaining to Jyothi Laboratories Ltd., [“JLL” for short] born by the assessee, JLL is eligible for 80-IB. Therefore, the assessee, to increase the profits of JLL adopted colourable device. The expenses incurred by the assessee clearly related to the business of JLL and not related to the assessee. He further submitted that the expenses incurred by the assessee because receivable on the day of incurring of expenditure itself and accordingly income accrued on that date. Learned DR relied on the decision of Bombay High Court in the case of Vodafone International Holdings B.V v. Union of India (311 ITR 46)

7. We have heard the rival submissions and perused material on record. We are of the considered opinion that the issue is squarely covered in favour of the assessee by the Tribunal order cited supra. The decision relied on by the learned DR in the case of Vodafone International Holdings B.V (supra) does not apply to the present case as the facts are different. Even the arguments raised by the learned DR have already been considered by the Tribunal in its order (supra) in paragraphs 29 to 31 and concluded the issue as under:

29. The learned DR contended that the addition was rightly made for the reason that JLL had also taken advantage of the advertisement expenditure incurred by the assessee and hence it cannot be said that the advertisement expenditure was wholly and exclusively for the purpose of assessee's business. We are not convinced with the submission made on behalf of the Revenue for the reason that the advertisement expenditure was, in fact, incurred by the assessee wholly and exclusively for his business. The genuineness of this expenditure has not been doubted by the Revenue authorities. Further it is not the case of the AO that the agreement with JLL was sham or bogus. Their objection to the allowability in entirety is that JLL had also obtained advantage out of this expenditure and to that extent the character of wholly and exclusively is lost. In our considered opinion so long as the expenditure is incurred wholly and exclusively for the purpose of business, nothing should come in the way of allowing deduction even if some benefit from the expenditure has flown to anybody else. Our view is fortified by the judgment of the Hon'ble Supreme Court in Sassoon J. David & Co. Pvt. Ltd. v. CIT (1979) 118 ITR 261 (SC). We find that no part of the advertisement expenditure incurred by the assessee can be related to the non-business purpose of the assessee. Under these circumstances, we are of the considered opinion that the entire advertisement expenditure incurred by the assessee was ‘wholly and exclusively’ for the purpose of assessee's business.

30. Now comes the second limb of this issue, by which the ld CIT(A) has held that the assessee was entitled to reimbursement of advertisement expenses from JLL and to the extent of the nonreimbursement, there has resulted income to the assessee. From the titles of the assessment order, it can be noted that the assessee was following mercantile system of account. Under this system of accounting income is charged to tax when it accrues to the assessee. An income is said to accrue when absolute right to receive such income is acquired. The actual receipt of the amount at a later date cannot mar the character of income and escape taxation, if it has accrued. The Hon'ble Supreme Court in E.D Sassoon & Company Ltd. v. CIT (1954) 26 ITR 27 (SC) held that in order to determine whether the income accrued to the assessee it is necessary that he must have right to receive the same or that a right to the income, profits or gains should have become vested in him though its valuation may have been postponed. The learned DR cited the judgment of the Hon'ble Supreme Court in the case of Morvi Industries Ltd. v. CIT (1971) 82 ITR 835 (SC)) to contend that the income had accrued to the assessee when he incurred the advertisement expenditure on behalf of JLL. Not receiving the requisite share from JLL, in the opinion of the ld. DR resulted in unilateral relinquishment of income after becoming due which could not escape the liability to tax. We have absolutely no doubt in our mind that if a particular income has accrued to the assessee, that cannot go out of the purview of tax net, simply because of the reason that; it was subsequently relinquished. It is the time of accrual of income, which attracts taxability and not the later events. Accrual of income takes place when the right to receive the income is finally vested in the assessee. There may be several factors, depending upon the situation to situation, for determining that when the right to receive income vests in the assessee. In order to find out the amount and the time at which the assessee acquired the right to such reimbursement of advertisement expenses, it is relevant to look into the relevant clauses of the agreement. The authorities below have heavily relied on clause 16 of the agreement between the assessee and JLL for coming to the conclusion that the assessee was entitled to receive the reimbursement of expenses and the income had resulted……….

31.………….Coming to the facts of the instant case, we find that there is no material to suggest even remotely that any amount more than Rs. 55.86 lacs was determined, which the assessee failed to account for. In the absence of determination of the alleged amount reimbursable by JLL to the assessee, no hypothetical exercise is permissible to hold that the amount of Rs. 527.85 lacs accrued to the assessee as his income, which was not accounted for. We are of the considered opinion that the ld. CIT(A) erred in sustaining the partial addition. We, therefore, order for the deletion of this addition.”

Respectfully following the decision of the co-ordinate bench of the Tribunal in assessee's own case relating to Assessment Year 1997-1998, wherein the Tribunal deleted the disallowance made on account of advertisement expenses, we allow this ground of appeal raised by the assessee and order accordingly. Thus, this ground of appeal raised by the assessee in both the appeals is allowed.

8. In addition to the above, the assessee has raised the following additional grounds of appeal:

Assessment Year 1998-1999:

“1. The learned Assessing Officer (AO) erred in disallowing depreciation on buildig on the alleged premise that component of land is included therein.

2. The AO erred in adding Rs. 37,900/- to the income of the Appellant on the count that they pertain to the prior years.”

Assessment Year 1999-2000:

“1. The learned Assessing Officer (AO) erred in disallowing depreciation on building on the alleged premise that component of land is included therein.

2. The AO erred in adding Rs. 1,052/- to the income of the Appellant on the count that they are personal nature.

3. The AO erred in adding interest Rs. 360/- to the income of the Appellant”.

9. As the first ground of appeal raised by the assessee in both the assessment years i.e, disallowance of depreciation on building on the alleged premise that component of land is included therein is a legal issue, we have admitted the same for consideration. However, in order to give an opportunity to the Revenue to verify the relevant facts, we restore this issue to the file of the Assessing Officer with a direction to consider and decide the same on merits in accordance with law. Thus, the first additional ground of appeal raised by the assessee in both the assessment years is allowed for statistical purpose.

10. As regards additional ground No. 2 relating to Assessment Year 1998-1999 & the additional ground Nos. 2 & 3 relating to Assessment Year 1999-2000, it is observed that the issue sought to be raised therein is purely a factual issue and the same having not been raised before the Assessing Officer or CIT (A) cannot be entertained at this stage. We, therefore, decline to admit the said additional grounds.

ITA Nos. 741 & 742 (Mum) 2005 (Revenue's appeals for assessment years 1998-1999, 1999-2000):

11. The common ground of appeal raised by the Revenue in both of its appeals is as under:

“1. On the facts and in law, the Ld. CIT (A) has erred in:

(i) reducing the amount of addition on account of advertisement expenses from Rs. 8,55,68,000/- to Rs. 5,52,20,293/- (for A.Y 199811999)/Rs. 14,49,95,000/- to Rs. 7,01,75,973/- (for A.Y 1999-2000).

(ii) not appreciating that the assessee was entitled to full reimbursement of such expenses under the relevant agreement and the claim of deduction for failure to seek reimbursement was not tenable.

(iii) Rejecting the formula for apportionment of reimbursable expenses adopted by the A.O which was based on the terms of the contract and substituting his own formula which had no rational basis.”

12. The learned AR submitted that this issue is also covered by the decision of the Tribunal in assessee's own case relating to Assessment Year 1997-1998. The learned DR relied on the order of the Assessing Officer.

13. We have heard the rival submissions and perused the records. Similar issue has been raised by the Revenue in its appeal in ITA No. 740.Mum/2005 relating to the Assessment Year 1997-1998 in assessee's own. After deliberating upon the issue at length and elaborately discussed the facts and legal aspects on this issue, the co-ordinate bench of the Tribunal decided the issue against the Revenue. Respectfully following the ratio laid down by the co-ordinate bench of the Tribunal, we decide the issue against the Revenue. Thus, this ground of appeal raised by the assessee in both the assessment years is dismissed.

14. In the result, both the appeals filed by the assessee being ITA Nos. 588 & 599.Mum/2005 are partly allowed as indicated above and both the appeals filed by the revenue being ITA Nos. 741 & 742.Mum/2005 are dismissed.

M.P. Ramachandran, U... v. Dcit, Central Circle...