Sun Tan Trading Co. Ltd. v. The Deputy Commissioner of Income Tax & Ors.

(c) the sales promotion expenses have been incurred by petitioner at its own discretion for the purpose of its own business as per the Distribution Agreement entered into by petitioner with Diageo group companies. The fact that additional customs duty has been paid by petitioner can in no way lead to the conclusion that the sales promotion expenses, etc. do not pertain to the business of petitioner and are not allowable as deduction on account of violation of any law. Petitioner is engaged in the business of distribution of alcoholic beverages and the sales promotion and other expenses are incurred for the purpose of such business and, therefore, the same is clearly relatable to the business of petitioner. Moreover, in the affidavit in reply, in paragraph 3.[1] itself it has been admitted that petitioner was engaged in the business of importing and trading in foreign made foreign liquors. Even the reasons recorded says petitioner was engaged in import of alcoholic beverages from M/s. Diageo Brands BV and petitioner was in the business of importing and trading in foreign made foreign liquors. Therefore, the expenses proposed to be disallowed under Section 37 of the Act certainly pertains to the business of petitioner;

(d) petitioner has undertaken the obligation to incur the sales promotion expenses as per the distribution agreement and, therefore, the expenditure is clearly incurred for the purpose of the business of petitioner. Merely because the Settlement Commission has revalued the purchase price of the goods to determine the value of the customs duty on account of petitioner’s undertaking the obligation to incur the sales promotion expense, cannot lead to a conclusion that sales promotion expenditure has not been incurred for the purpose of the business of petitioner; (e) respondent no.1 erred in holding in the impugned order that the sales promotion expenses were incurred by petitioner as per the direction of DIPL, and, therefore, was not related to the business of petitioner. The sales promotion expenses are admittedly related to the business of petitioner and, merely because the same has been incurred at the direction of another company, does not mean that the same will cease to be expenditure relatable to the business of petitioner. If there is an undervaluation of the import duty, the consequence of that will be that petitioner would be liable to pay additional import duty but the same can in no way lead to the conclusion that the expenditure incurred by petitioner for selling the imported goods were incurred in violation of any law. Therefore, respondent no.1 cannot have any reason to believe that income chargeable to tax has escaped assessment; (f) even on demurer, if it is accepted that the sales promotion expenses are incurred by petitioner on behalf of Diageo, there is no reason to believe that any income chargeable to tax has escaped assessment. In such situation, the income of petitioner would be reduced to that extent as it must follow that the purchase cost of petitioner was higher to that extent. Therefore, there is no question of any reason to believe that any income chargeable to tax has escaped assessment; (g) Respondent no.1 in the impugned order has accepted that the sales promotion expenses should form part of the sale price of the beverage sold by the Diageo Group to petitioner. Therefore, it is clear that even if it is held that the sales promotion expenses are not allowable as deduction under Section 37(1) of the Act on the ground that the same is not incurred for the purpose of the business of petitioner, the same would be allowed as cost of the purchases made by petitioner. Reliance by respondent no.1 on the decision of the Madras High Court in the case of Commissioner of Income Tax V/s. India Cements Ltd.[1] is completely wrong as the facts in the said case are distinct from the facts in the present case. In the said case, the assessee had paid remuneration to the managing agent in contravention of the Companies Act and had claimed the same as an allowable deduction under Section 37 of the Act. This Court has held that remuneration payable to the managing agent was in excess of the limits prescribed under Section 348 read with Section 349 of the Companies Act and, therefore, to the extent of the excess remuneration, the same would not be allowable as deduction under Section 37 of the Act. In the present case, it is nobody's claim that the expenditure incurred by petitioner on sales promotion, etc. is in contravention of any provision or statute and, 1 (2000) 241 ITR 62 therefore, there is no question of disallowing the said expenditure incurred by petitioner.

(i) The Commissioner of Income Tax, Central - II V/s. M/s.

(ii) The Commissioner of Income Tax V/s. M/s. Star India P.

(iii) The Commissioner of Income Tax – 11 V/s. M/s. Star India

(iv) Commissioner of Income Tax V/s. N.G.C. Network (India)

(v) Sassoon J. David and Co. P. Ltd. V/s. Commissioner of

(vi) Prashant S. Joshi & Anr. V/s. Income Tax Officer & Anr.[7]

(vii) Neetu M. Chandaliya V/s. Income Tax Officer 14(2)(3)8

(vii) Ramona Pinto V/s. Deputy Commissioner of Income Tax[9]

(viii) Vaman Prestressing Co. Pvt. Ltd. V/s. Additional

3 Income Tax Appeal No.165 of 2009 dated 24.03.2009 4 Special Leave Petition (Civil) No.14850 of 2010 dated 16.2.2022 5 (2014) 368 ITR 738 (Bom) 6 (1979) 118 ITR 261 (SC) 7 (2010) 324 ITR 154 (Bom) 8 (2023) SCC Online Bom 2046 9 (2023) 156 taxmann.com 282 (Bombay) 10 (2023) SCC Online Bom 1947 13 Mr. Chhotaray submitted as under: (a) petitioner cannot be stated to be engaged in the business of distribution of alcoholic beverages; (b) the Settlement Commission has revalued the purchase price of the goods to determine the value of the customs duty on account of petitioner’s undertaking the obligation to incur the sales promotion expense and, therefore, sales promotion expenditure has not been incurred for the purpose of the business of petitioner;

(c) the sales promotion expenses were incurred by petitioner as per the direction of DIPL, and, therefore, was not related to the business of petitioner;

(d) there is undervaluation of import duty in violation of

Custom Rule. Therefore, as held in India Cements Ltd. (Supra), the expenses having been incurred, in violation of law, the same were not allowable as deduction under Section 37 of the Act; (e) in determining whether the commencement of reassessment proceedings was valid, it has to be only seen whether there was prima facie material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage (Raymond Woollen Mills Ltd. V/s. Income Tax Officer and Ors.11 ). Since there is no assessment under Section 143(1) of 11 (1999) 236 ITR 34 (SC) the Act, the question of change of opinion does not arise. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (Assistant Commissioner of Income Tax V/s. Rajesh Jhaveri Stock Brokers P. Ltd.12 ). Since the Settlement Commission has made observations against petitioner, it cannot be stated that the report of the Settlement Commission does not constitute relevant material or that on that basis, the Assessing Officer could not have reasonably formed the requisite belief (Income Tax Officer V/s. Selected Dalurband Coal Co. Pvt. Ltd.13 ); (f) where detailed reasons have been recorded by the Revenue in the satisfaction note, it could not be said that the reasons recorded did not satisfy the prerequisite conditions of Section 132(1) of the Act (Principal Director of Income Tax, Investigation V/s. Laljibhai Kanjibhai Mandalia14 ). In Maddi Venkataraman and Co. (P.) Ltd. V/s. Commissioner of, the Apex Court held that the asseesee had indulged in transactions in violation of the provision of Foreign Exchange (Regulation) Act. The assessee's plea was that unless it entered into such a transaction, it 12 (2007) 291 ITR 500 (SC) 13 (1996) 217 ITR 597 (SC) 14 (2022) 140 taxmann.com 282 (SC) 15 (1998) 229 ITR 534 (SC) would have been unable to dispose of the unsold stock of inferior quality of tobacco. In other words, the assessee would have incurred a loss. The Court held spur of loss cannot be a justification for contravention of law. The Apex Court observed that the asseessee was expected to carry on the business in accordance with law and that the expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion cannot be allowed as deduction. This judgment, in our view, is not applicable because in that case and also in India Cements Ltd. (Supra), the expenditure incurred were in violation of the provisions of the FERA and Company Law and hence, the Court held that it would be against public policy to allow the benefit of deduction under one statute of any expenditure incurred in violation of the provisions another stature or any penalty imposed under another statute. In the case at hand, the expenditure claimed under Section 37 of the Act was not for evading the Customs Act but admittedly was for the sales promotion expenses incurred at its own discretion for the purpose of its own business as per the Distribution Agreement with DIPL. Even if the sales promotion expenses have been incurred at the direction of another company, it does not mean that the same will cease to be expenditure relatable to the business of petitioner; (g) Mr. Chhotaray also relied upon Income Tax Officer V/s. Biju Patnaik16 to submit that even if the notice or the reason to believe does not disclose the satisfaction of the requirement of Section 147 of the Act, if from the averments in the counter affidavit it is clear that the Income Tax Officer had applied his mind to the facts and after prima facie satisfying himself of the existence of two conditions reached the conclusions for reopening the assessment, it being an administrative action, the notice or order does not per se become illegal. It is open to the assessee to place all necessary material facts and the Income Tax Officer is free to consider the material and make a decision in that regard. Relying on Sri Krishna Pvt. Ltd. V/s. Income Tax Officer17, it was submitted that the enquiry at the stage of finding out whether the reassessment notice is valid is only to see whether there are reasonable grounds for the Income Tax Officer to believe and not whether the omission/failure and the escapement of income is established. It was also submitted that as was done in that case, this Court can call for the records and proceedings to verify the veracity of the reasons recorded by the Assessing Officer. FINDINGS:

14 On a proper reading of the reasons recorded for alleged escapement of income, it emanates that the sole basis on which the Assessing Officer seeks to disallow expenditure in the aggregate of Rs.58.42 16 188 ITR 247 17 221 ITR 538 (SC) Crores for the three years (Rs.6,73,73,981/- for Assessment Year 2007-

2008) on account of advertisement, sales promotion, product display posters, etc. was it did not pertain to the business of assessee and, therefore, not allowable under Section 37 of the Act.

15 What we need to consider is, (a) whether there was any basis for respondent no.1 to form a belief that any income chargeable to tax has escaped assessment within the meaning of substantive provisions of Section 147 of the Act? (b) Whether the expenditure incurred for promoting the business to earn profits can be claimed as deduction under Section 37 of the Act even though somebody other than assessee is also benefited by the expenditure?

(c) Whether the Assessing Officer in the reassessment proceedings can disallow the expenditure to the extent of Rs.58.42 Crores for the three years (Rs.6,73,73,981/- for Assessment Year 2007-2008) out of the advertisement and sales promotion expenses even if it is incurred on the directions of Diageo? The fact that the expenses incurred by petitioner were for advertisement and sales promotion, is not in dispute.

16 In Prashant S. Joshi (Supra) the Division Bench of this Court held that the Assessing Officer must have reasons to believe that income has escaped assessment and at that stage an established fact that income has escaped assessment is not required. The only question, at the stage of issuing notice is whether there was relevant material on which a reasonable person could have formed a requisite belief and whether the materials would conclusively prove the escapement is not the concern at that stage because formation of belief by the Assessing Officer is within the realm of subjective satisfaction. The Court held at the same time the touchstone to be applied is whether there was reason to believe that income had escaped assessment. The Division Bench also held that the act of taking notice cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the court but the existence of the belief is the sine qua non for a valid exercise of power. In the facts and circumstances of that case, the Division Bench held that it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. In Commissioner of Income Tax V/s. Kelvinator of India Ltd.18 the Hon'ble Apex Court held that the Assessing Officer has power to reopen provided there is tangible material to come to the conclusion that there is escapement of income from assessment. The reasons must have a live link with the formation of the belief. 18 (2010) 320 ITR 561 (SC) In Export Credit Guarantee Corporation of India Ltd. V/s. Additional Commissioner of Income Tax and Ors.19, the Court held that when an assessment is sought to be reopened within a period of four years from the end of the relevant assessment years, the test to be applied is whether there is tangible material to do so. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. An Assessing Officer who has plainly ignored the relevant material and arrived at an assessment acts contrary to the law. If there is an escapement of income in consequence, the jurisdictional requirement of Section 147 of the Act would be fulfilled on the formation of a reason to believe that income has escaped assessment. Did the Assessing Officer have any tangible material to reopen the assessment in this case is a question which we have to answer. Having considered the reasons recorded, the only basis to disallow expenditure in the aggregate of Rs.58.42 Crores for the three years on account of advertisement, sales promotion, product display posters, etc. was it was not pertaining to the business of assessee and, therefore, not allowable under Section 37 of the Act. It is evident that there was absolutely no basis to respondent no.1 to form a belief that any income chargeable to tax has escaped assessment within the meaning of substantive provisions of Section 147 of the Act. As held by this Court in Prashant S. 19 (2013) 350 ITR 651 (Bom) Joshi (Supra), Explanation 2 to Section 147 creates a deeming fiction of cases where income chargeable to tax has escaped assessment. Clause (b) deals with a situation “where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return.” For the purpose of Clause (b) to Explanation 2, the Assessing Officer must notice that the assessee has understated his income or has claimed excessive loss, deduction, allowance or relief in the return and taking of such notice must be consistent with the provisions of the applicable law. It cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. Though the sufficiency of the evidence or material is not open to scrutiny by the court but the existence of the belief is the sine qua non for a valid exercise of power. Paragraph 20 of Prashant S. Joshi (Supra) reads as under:

20. For all these reasons, it is evident that there was absolutely no basis for the first respondent to form a belief that any income chargeable to tax has escaped assessment within the meaning of the substantive provisions of Section

147. Explanation 2 to section 147 creates a deeming fiction of cases where income chargeable to tax has escaped assessment. Clause (b) deals with a situation "where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return." For the purpose of clause (b) to explanation 2, the Assessing Officer must notice that the assessee has understated his income or has claimed excessive loss, deduction, allowance or relief in the return. The taking of such notice must be consistent with the provisions of the applicable law. The act of taking notice cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the Court but the existence of the belief is the sine qua non for a valid exercise of power. In the present case, having regard to the law laid down by the Supreme Court it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons which have been recorded could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of section 147. In these circumstances, the petition shall have to be allowed by set- ting aside the notice under section 148.

17 In N.G.C. Network (India) P. Ltd. (Supra), the following two questions of law were considered: (a) Whether in the facts and circumstances of the case and in law, the Hon'ble ITAT is justified in confirming the order of the Commissioner of Income Tax (Appeals) deleting the disallowance of Rs.4,14,20,843/- made by the Assessing Officer out of advertisement and publicity expenses incurred by the Assessee? (b) Whether in the facts and circumstances of the case and in law, the Hon'ble Income Tax Appellate Tribunal was justified in not taking cognizance of the transfer pricing provisions because, the expenditure incurred by the Assessee by way of advertisement and publicity expenses, substantially benefited the two foreign principals and the Assessee did not receive any compensation on that account from the foreign principals and whether upon the aforesaid consideration, the Hon'ble Income Tax Appellate Tribunal was justified in not upholding the order of the Assessing Officer? In that case during the assessment proceedings, the Assessing Officer observed that the assessee's expenditure under head “Advertising and Publicity Expenses” of Rs.6,21,31,262/- was claimed as deduction under Section 37(1) of the Act. The Assessing Officer noted that respondent had incurred expenses towards advertising and publicity which benefited not only the assessee but also the foreign principals and held that the entire amount was not allowable as deduction under Section 37(1) of the Act. The Assessee submitted that the amount spent for the benefit of the assessee but for the promotion of channel, the distribution rights will not generate sufficient returns since the promotion and publicity alone help garner higher income and, therefore, the deduction under Section 37 of the Act could not be affected. Relying on the decision of Sassoon J. David and Co. P. Ltd. (Supra), it was submitted that merely because foreign principal was benefited by advertising, promotion and publicity it will not prevent respondent-assessee from claiming benefit of deduction under Section 37(1) of the Act. The Court held that the assessee was entitled to the deductions even though foreign principal has also benefited by the expenditure. Paragraphs 19, 21, 22 and 23 of the said judgment read as under:

19. Having considered rival contentions we are in agreement with Mr. Kaka. The main grounds on which the revenue has questioned the order of the tribunal are (a) non disclosure in form 3CEB of the fact that the principal is also a beneficiary of the advertising expenses; (b) that the advertising and promotional expenses are not wholly for the benefit of the assessee but it also benefited the principal who was an associated enterprise; (c) that advertising and publicity expenses were far higher than the amount of revenue earned and lastly, that although foreign principals i.e. Associated Enterprise benefited from advertising and publicity no compensation was paid by the foreign principals to the assessee to avail of such benefits. xxxxxxxxxxxxxxx

21. The contention that the expenditure should have been wholly and exclusive for the purpose of business of the assessee under section 37(1) read with provisions of section 40A(2) as being excessive and unreasonable does not appeal to us. There can be no doubt in the instant case, that in view of decision of the Supreme Court in Sassoon David (supra) it cannot be said that the expenditure was not wholly or exclusively for benefit of the assessee. The mere fact that foreign principals also benefited does not entail right to deny deduction under section 37(1). Furthermore, it is seen that all the amounts earned by the assessee were brought to tax, especially in view of the fact that the payment of expenses were made to Indian residents and there payments were not required to be included in form 3CEB since Section 92 which governs the effect of form 3CEB covers only international transactions. Furthermore, it is seen that the respondents income from subscription fee is variable and through commission received on the advertising sales is 15% of the value of ad-sales. The Assessing Officer's contention that the assessee received fixed income is not justified and there is certainly, in our view, a direct nexus between the amount spent on advertising and publicity, and the appellant's revenue.

22. Advertisers who advertise on these channels act through media houses and advertising agencies and they work to media plans designed in the manner so as to maximise value for the advertiser. They will evaluate expenditure with channel penetration in the market place inasmuch as only channels with high viewership would justify the higher advertising rates which is normally sold in seconds. Merely having high quality content will not ensure high viewership. This content has to be publicized. The great reach of the publicity, the higher chances of larger viewership. The larger the viewership, the better chances of obtaining higher advertisement revenue. The higher advertisement revenue, the higher will be commission earned by the respondentassessee. Accordingly, we have no doubt that there is a direct nexus between advertising expenditure and revenue albiet the fact that there may be a lean period before revenue picks up notwithstanding high amount spent on such publicity. This justifies the higher expenditure vis-a-vis revenue noticed by the department.

23. It is also not necessary that the foreign enterprises must compensate the Indian agent for the benefit it receives or it may receive from the advertisement and promotion of its channels by agent in India. The agent in India earns commission from ad-sales and distribution revenue, both of which have sufficiently compensated the assessee. We would not expect the revenue to determine the sufficiency of the compensation received by the agent and as such we do not find any justification in this ground either. In the circumstances we answer questions of law (a), (b) and (c) in the affirmative in favour of the assessee and against the revenue. In the result the appeal is dismissed. No order as to costs. (emphasis supplied)

18 The Apex Court in Sassoon J. David and Co. P. Ltd. (Supra) held that ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under the Act even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under the Act if it satisfies otherwise the tests laid down by law. The relevant portions read as under: xxxxxxxxx It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961 which corresponds to section 10(2) (xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the 'necessity' of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read "any expenditure....laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed...." The introduction of the word 'necessarily' in the above section resulted in public protest. Consequently when section 37 was finally enacted into law, the word 'necessarily' came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2) (xv) of the Act if it satisfies otherwise the tests laid down by law. This view is in accord with the following observations made by this Court in The Commissioner of Income-tax, Madras v. Chandulal Keshavlal & Co. "Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher's Wiltshire Brewery Ltd. v. Bruce). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd. v. The Commissioner of Income-tax, West Bengal). But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee." (emphasis supplied)

19 Therefore, even if petitioner has incurred any expenditure towards advertisement, sales promotion, product display posters, etc. on the direction of the DIPL and these expenditures might have benefited Diageo as well, does not entail right to deny deduction under Section 37(1) of the Act. It is unacceptable to even suggest that the expenses were not incurred for the purpose of business of petitioner. This is because in the affidavit in reply itself it is admitted that petitioner was engaged in the business of importing and trading in foreign made foreign liquors. Even the reasons recorded states petitioner was engaged in import of alcoholic beverages from M/s. Diageo Brands BV and petitioner was in the business of importing and trading in foreign made foreign liquors. It is unacceptable to even suggest that just because the DIPL directed how to conduct the advertisement or sales promotion or that Diageo also benefited by the advertisement and sales promotion would mean the expenses were not incurred for the purpose of the business of petitioner. It is common knowledge that advertising and sales promotion will ensure higher sales and higher sales will ensure higher profitability to petitioner. There is no doubt that there is a direct nexus between the expenditure incurred and the business of petitioner.

20 In Biju Patnaik (Supra), that Mr. Chhotaray had relied upon in the case before the Apex Court, the reasons were recorded by the Assessing Officer in the order-sheet on 2nd July 1965 to state that although the assessee had claimed that the transfer of business was made on 31st March 1956, however, from the information available with the Assessing Officer, it appears that the transfer of business took place on 3rd November 1956. Thus, the assessee was liable to be taxed on the capital gain earned by the assessee in the accounting year ending on 31st March 1957. The Assessing Officer had, thereafter, issued a notice dated 31st July 1965 requiring the assessee to deliver within 30 days the return of income in the prescribed form. The Hon'ble Apex Court held that: It is undoubtedly true that the notice does not prima facia disclose the satisfaction of the two conditions precedent enjoined under section 147(a), but in the counter – affidavit filed by the Income–tax Officer in the High Court, he stated all the material facts. The Respondent had inspected the record and the record also bears out the existence of the material fact. The proceedings drawn upon which are abstracted earlier also show that Income–tax Officer has applied his mind to the facts on record and was prime facie satisfied that the reopening of the assessment for the assessment year 1957 – 58 was needed due to those stated facts. The Hon’ble Apex Court further held that: We reject the contention of Dr. Pal that the Income–tax Officer has no reason to believe that income has escaped assessment for the relevant accounting year for the reasons mentioned by the Income–tax Officer in the proceedings drawn on July 2, 1965. It is clear therefrom that the escapement of assessment was on account of omission or failure on the part of the Respondent to disclose the material fact truly and fully.

21 In our view, Mr. Chhotaray has wrongly relied on the aforesaid decision to suggest that this Court must look beyond the reasons recorded to determine the validity of the notice issued under Section 148 of the Act. The finding of the Hon’ble Apex Court, as extracted above, is that the notice issued under Section 148 of the Act does not show the fulfillment of the condition under Section 147 of the Act. However, to decide on the issue of belief of the Assessing Officer, the Hon’ble Apex Court has referred to the noting made by the Assessing Officer on 2nd July 1965, which is equivalent to the reasons recorded by the Assessing Officer. The Hon’ble Apex Court has on the basis of the said noting (reasons) concluded that the said reasons reflect application of mind by the Assessing Officer and, hence, the reopening was justified. It is not possible to interpret the decision of the Hon’ble Apex Court as sought to be done by Mr. Chhotaray, i.e., to say that the validity of the reopening is to be decided on the basis of not only the reasons recorded but other material as well. If the interpretation as sought by the Revenue is given then, it would lead to the recording of reasons being an empty formality as the Assessing Officer would always be able to justify the reopening by not only referring to the reasons but also surrounding material and circumstances. The same can never be the intention of the provisions of Section 147 of the Act, which specifically provides that the Assessing Officer must have reason to believe that income has escaped assessment. The approval is required under Section 151 of the Act from the superior authority on the “reasons recorded” by the Assessing Officer. This means that the superior authority under Section 151 of the Act is giving the sanction/approval to reopen the assessment based on the reasons recorded. If the view is taken that the validity of the reopening can be considered beyond the reasons, the process of seeking the approval as well as the approval which is based on the reasons would be rendered invalid and otiose.

22 Further, the Hon'ble Apex Court in the case of GKN Driveshafts (India) Ltd. V/s. Income Tax Officer20 has held that the process to be followed in reopening cases is that once a notice under Section 148 of the Act is issued, the assessee must file the return of income and, thereafter, the reasons recorded by the Assessing Officer would be provided to the assessee. The assessee can file its objection and the Assessing Officer is thereafter bound to dispose of the objections by passing a speaking order. The process prescribed by the Hon’ble Apex Court also proceeds on the footing that the objections are required to be filed on the basis of the “reasons recorded” by Assessing Officer and the Assessing Officer is required to pass order justifying the reopening on the basis of the said reasons. Therefore, if the Assessing Officer is allowed to justify the reopening beyond the reasons, the whole process prescribed by the Hon’ble Apex Court will also be rendered nugatory and infructuous.

23 Moreover, the Hon’ble Delhi High Court in the case of Alcatel – Lucent France V/s. ADIT21 has held that the decision of the Hon’ble Apex Court in the case of Biju Patnaik (Supra) was considering the pre-amendment, i.e., before 1989 provision and the post amendment provision has been explained by the Hon'ble Apex Court in the case of Commissioner of Income Tax V/s. Kelvinator of India Ltd.22 and, therefore, 20 259 ITR 19 (SC) 21 69 Taxmann.com 379 (Delhi) 22 320 ITR 561 (SC) the decision of Biju Patnaik (Supra) cannot be relied upon by the Revenue post amendment.

24 As regards, Sri Krishna Pvt. Ltd. (Supra) relied upon by Mr. Chhotaray to allege that it is open to the Courts to go beyond the reasons to consider the validity of the reopening of the assessment, the interpretation canvassed is also based on the misinterpretation of the decision of the Hon’ble Apex Court. In this case, reasons were recorded to the effect that a large number of loans obtained by the assessee were bogus loans and an amount of Rs.11,51,275/- was added to the income of the assessee in the assessment year 1960-1961. Similar loans were noticed for the assessment year 1959–1960 amounting to Rs.8,53,298/- as per the balance sheet and, therefore, Assessing Officer has reason to believe that there was omission or failure on the part of the assessee – company to disclose fully and truly all material fact necessary for assessment for the assessment year 1959-1960. The case records were called for by the Hon’ble Apex Court to verify the veracity of the reasons recorded by the Assessing Officer, i.e., the reference to the term “similar loans” in the reasons means loan from same persons as in the assessment year 1960-1961. Therefore, the case records were called for by the Hon’ble Apex Court to verify the fact mentioned in the reasons and not to justify the reopening beyond the reasons as has been contended by the Revenue in the present case. This is further clear from the finding in placitum D at page 546, where the Hon’ble Apex Court held that “We must presume that the Income–tax Officer did find that a large number of alleged lenders who were found to be bogus during the assessment year 1960–1961 were also put forward as lenders during assessment year 1959–1960 as well. Evidently, this is what he meant in the context, when he spoke of “similar loans” being noticed for the year in question as well. In such a situation, it is impossible to say that the Income–tax Officer had no reasonable grounds to believe that there has been no full and true disclosure of all material fact by the assessee during the relevant assessment year and that on that account, income chargeable to tax has escaped assessment.” It is nobody's case that the case records can be called to verify the fact mentioned in the reasons to consider the validity of the reasons but, certainly, in our view, the case records cannot be looked at, to supplement the reasons to justify the reopening of the assessment.

25 In view of what is discussed above, when we apply the touchstone as to whether there was reason to believe that income had escaped assessment, in our view, it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons, which have been recorded, could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of Section 147 of the Act.

26 In these circumstances, the petition shall have to be allowed by setting aside the notice dated 28th March 2024 issued under Section 148 of the Act as well as the impugned order dated 29th September 2015 passed under Section 148 of the Act, which we hereby do.

WRIT PETITION NO.261 OF 2016 WITH WRIT PETITION NO.271 OF 2016

28 In these two petitions also the reasons recorded are identical to the reasons recorded in Writ Petition No.806 of 2016. Therefore, our findings above in Writ Petition No.806 of 2016 will squarely apply to these two petitions as well.

29 Further in Writ Petition No.261 of 2016, where notice under Section 148 of the Act has been issued after the expiry of four years from the end of the relevant assessment year and where assessment under Section 143(3) of the Act had also been completed, the proviso to Section 147 of the Act would apply in as much as reopening of assessment is permissible only where there has been failure to truly and fully disclose material facts for the assessment. In the reasons recorded for reopening, there is not even an allegation that there was failure on the part of the assessee to truly and fully disclose material facts. On this ground also the notice issued and the order rejecting objections have to be quashed and set aside.