Gujarat H.C : Where in original assessment made under section 143(3) expenditure on discount was allowed as revenue expenditure, reassessment after expiry of four years from relevant assessment year to disallow it as a capital expenditure was not justified

High Court Of Gujarat

Parle Sales & Services (P.) Ltd. vs. ITO

Assessment Year : 1996-97

Section : 147

Ms. Harsha Devani And R.M. Chhaya, JJ.

SCA No. 5001 Of 2002

April 22, 2011

JUDGMENT

Ms. Harsha Devani, J. – By this petition, under article 22633 of the constitution of India the petitioner has challenged the notice dated March 21, 2002, issued by the respondent under section 148 of the Income-tax Act, 1961 (“the Act”), reopening the assessment of the petitioner for the assessment year 1996-97.

2. The petitioner, a private limited company, is engaged in the business of selling beverages manufactured by Parle Bottling Ltd. and Parle International Ltd. The manufacturing company launched a new product by the name of “Fanta”. The petitioner, therefore, and for other reasons incurred expenditure by way of discount of Rs. 28.98 lakhs to the customers as against Rs. 6.15 lakhs incurred in the preceding year in respect of the well established products, which it was selling for some years in the past.

3. The Assessing Officer issued notice dated June 24, 1998, requiring the petitioner to explain, inter alia, as to why there was disproportionate increase of discount to the extent of Rs. 28,98,127 in comparison to the previous year. The petitioner tendered its explanation, vide letter dated July 21, 1998. Subsequently, another letter dated November 27, 1998, came to be addressed by the petitioner to the Assessing Officer in respect of the same issue. The Assessing Officer, after considering the disproportionate increase in quantum of discount from Rs. 6.15 lakhs in the preceding year to Rs. 28.98 lakhs in the assessment year 1996-97, passed an order under section 143(3) of the Act on December 11, 1998, disallowing Rs. 2,74,064 from the total expenditure on this account in respect of the same. Against the said order the petitioner went in appeal to the Commissioner of Income-tax (Appeals), who, by his order dated September 21, 2000, allowed Rs. 1,90,395 from the said disallowed discount of Rs. 2,74,064. Subsequent thereto the respondent issued the impugned notice dated March 21, 2002, stating that income chargeable to tax had escaped assessment for the assessment year 1996-97 and called upon the petitioner to file a return including such income. The petitioner, therefore, addressed a letter dated April 10, 2002, requesting the respondent to furnish the reasons recorded for issuance of the said notice. Despite such request, since, no reasons were furnished, the petitioner approached this court by way of the present petition.

4. Mr. J.P. Shah, learned advocate appearing on behalf of the petitioner, submitted that the impugned notice under section 148 of the Act has been issued on March 21, 2002, in respect of the assessment year 1996-97 which is clearly beyond a period of four years from the end of the relevant assessment year. It was submitted that earlier the assessment had been framed under section 143(3) of the Act and as such, since the notice has been issued beyond a period of four years from the end of the relevant assessment year, the ingredients of the proviso to section 147 of the Act would be required to be fulfilled by the respondent for the purpose of assuming valid jurisdiction under section 147 of the Act. Referring to the reasons recorded, it was submitted that there is not even whisper therein to indicate even failure or omission on the part of the petitioner to disclose fully and truly all material facts. It was, accordingly, submitted that the condition precedent for invoking section 147 of the Act beyond a period of four years from the end of the relevant assessment year is clearly not satisfied, hence, the reopening of the assessment is without jurisdiction.

5. On the other hand, Ms. Mauna M. Bhatt, learned senior standing counsel appearing on behalf of the respondent, opposed the petition submitting that the respondent has rightly issued notice under section 148 of the Act in view of the fact that income chargeable to tax had escaped assessment for the reasons recorded by the respondent.

6. This is a case where the original assessment had been framed under section 143(3) of the Act. The notice under section 148 of the Act has been issued on March 21, 2002, in relation to the assessment year 1996-97. Hence, undisputedly, the notice has been issued after the expiry of a period of four years from the end of the relevant assessment year. In these circumstances, for the purpose of assuming valid jurisdiction under section 147 of the Act, the condition precedent for invoking section 147 of the Act after the expiry of a period of four years from the end of the relevant assessment year as laid down under the proviso to section 147 of the Act, would be required to be fulfilled. The Assessing Officer would, therefore, be required to establish : firstly, that income chargeable to tax has escaped assessment ; and, secondly, that such escapement is by reason of failure on the part of the petitioner (i) to file a return under section 139 or in response to notice under sub-section (1) of section 142 or section 148 of the Act ; or (ii) to disclose fully and truly all material facts necessary for its assessment. In the present case, admittedly, the first situation does not exist. In the circumstances, the Assessing Officer is required to establish that income chargeable to tax has escaped assessment by reason of failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for the assessment year under consideration.

7. For this reason it may be germane to refer to the reasons recorded by the Assessing Officer for reopening the assessment which read as under :

“It was noticed that the expenditure for discount of Rs. 26,24,057 paid to various customers has been paid because of huge competition in the bottled aerated water. The assessee has paid this huge amount in order to ward off competition in the business which would result in enduring benefits to the assessee and so it could have been held as capital expenditure. However, the said expenditure was allowed as revenue expenditure.

As per the decision of the Supreme Court in the case of CIT v. Coal Shipments P. Ltd. [1971] 82 ITR 902 (SC) any payment made to ward off competition in business would constitute capital expenditure, if the object of making such payment is to derive an enduring advantage of eliminating competition over some length of time. The same view has also taken by the Gujarat High Court in the case of Gujarat Mineral Development Corporation Ltd. v. CIT [1983] 143 ITR 822 (Guj). Due to the above mistake, income is underassessed by Rs.26,24,075 and this resulted in short levy of tax of Rs. 20,03,729.

I have, therefore, reason to believe that income has escaped assessment to the extent of Rs. 26,24,075.

Notice under section 148 is required to be issued.”

8. On a plain reading of the reasons recorded, it is apparent that there is not even whisper as regards any failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment. All that is stated is that the expenditure, which has been allowed as a revenue expenditure could have been allowed as capital expenditure in the light of the decision of the Supreme Court in the case of CIT v. Coal Shipments P. Ltd. [1971] 82 ITR 902 (SC) and the decision of this High Court in the case of Gujarat Mineral Development Corporation Ltd. v. CIT [1983] 143 ITR 822 (Guj). In fact, in the reasons recorded, it is stated that due to mistake income had been underassessed. This mistake apparently is the mistake on the part of the Assessing Officer who framed the original assessment in allowing the expenditure which, according to the successor-Assessing Officer, could have been held to be capital expenditure. In the entire reasons recorded there is nothing whatsoever to indicate that there is any failure to disclose fully and truly all material facts on the part of the petitioner. In the circumstances, the basic requirement in invoking the provisions of section 147 of the Act after the expiry of a period of four years from the end of the relevant assessment year is clearly not satisfied, hence, the Assessing Officer could not have assumed valid jurisdiction under section 147 of the Act. The impugned notice issued under section 148 of the Act reopening the assessment under section 147 of the Act, therefore, cannot be sustained.

9. For the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice dated March 21, 2002 (exhibit F to the petition) issued by the respondent under section 148 of the Act is hereby quashed and set aside. Rule is made absolute accordingly. There shall be no order as to costs.

[Citation : 337 ITR 203]

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