Wp/3338/2018 Of Asian Paints Ltd v. Dy. Commissioner Of Income Tax Ltu And 2 Others

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 3338 OF 2018 Asian Paints Ltd. .. Petitioner v/s. Dy. Commissioner of Income Tax-LTU,Mumbai & Ors. .. Respondents Mr. Madhur Agarwal a/w Mr. Atul Jasani for the petitioner Mr. Suresh Kumar for respondent nos. 1 and 2 CORAM : AKIL KURESHI & M.S. SANKLECHA, J.J. P.C. DATED : 17[th] JANUARY, 2019 1.At the request of the parties, the petition is taken up for finaldisposal at this stage. 2.This petition under Article 226 of the Constitution of Indiachallenges notice dated 28[th] March, 2018 issued under Section 148 of the Income Tax Act, 1961 (“the Act” for short) by the Assessing Officer–respondent no.1. The impugned notice dated 28[th] March, 2018 seeksto reopen the assessment for Assessment Year 2011-12. 3.The petitioner carries on business of manufacturing and selling paints. In the previous year relevant to subject assessment year, thepetitioner had evolved a marketing strategy called “Colour Idea Stores”.This was with the intent of increasing its sales by sharing the cost ofrenovating the shop of the dealers. This renovation of shops of dealerswas with the desire to increase its sales by providing a dedicated areafor its products and having counters such as “Try and Decide”exclusively for their paints. 4.For the subject assessment year, the petitioner filed its return ofincome on 24[th] November, 2011 declaring a total income of Rs.972.95crores. In its return of income, the petitioner claimed expenses incurredon “Colour Idea Stores” as a part of its advertisement and salespromotion expenses. Thereafter, the Assessing Officer took up thepetitioner's return of income for scrutiny assessment and sought detailsof break up of the advertisement and sales promotion expenses andpassed an order dated 18[th] March, 2015 under Section 143(3) of the Actassessing the income at Rs.1058.42 crores. 5.On 28[th] March, 2018, the impugned notice was issued seeking to reopen the assessment for Assessment Year 2011-12. The reasons insupport of the impugned notice reads as under :- “In this case, the assessee filed original return of income of A.Y.2011-12 on 24.11.2011 declaring total income atRs.972,95,45,281/- under normal provision of Income Tax Act,1961 (the “Act”) and 1122,83,00,000/- u/s 115JB of the Act.Subsequently, the assessment was completed u/s 143(3) r.w.s.144C(3) of the Act on 18.03.2015 determining total income atRs.1058,42,40,442/- under normal provision of the Act and atRs.1122,83,00,000/- u/s 115JB of the Act. Since, the tax onincome assessed under normal provision of the Act was morethan the tax on Book Profit computed under MAT provision,income assessed under normal provision of the Act atRs.1058,42,40,442/-. 2.During the Course of the assessment proceedings for A.Y.2015-16, it is seen that the assessee company has incurred anamount of Rs.32,44,46,533/- towards “Colour Idea Store” anddebited the expense in the profit & loss account as “Advertisement& Sales promotion Expenses”. In this regard, during assessmentproceedings, the assessee was asked to furnish the details ofexpenses along with the copy of the agreement and otherdocumentary evidences. Further, the assessee was also asked tojustify the allow ability of the expense as revenue expense. 3.In response, the assessee furnished its submission and alsofurnished the copy of agreement. On perusal of the copy of theagreement submitted by the assessee, it emerges that the expensesincurred towards “Colour Idea Stores” by the assessee company iscapital in nature. The assessee company furnished a copy ofagreement dated 6[th] March, 2014 entered between M/s. AnanthaCorporation and M/s. Asian Paints Ltd. The relevant paras ofthe agreement is reproduced here under :- “Whereas : 3.In response, the assessee furnished its submission and alsofurnished the copy of agreement. On perusal of the copy of theagreement submitted by the assessee, it emerges that the expensesincurred towards “Colour Idea Stores” by the assessee company iscapital in nature. The assessee company furnished a copy ofagreement dated 6[th] March, 2014 entered between M/s. AnanthaCorporation and M/s. Asian Paints Ltd. The relevant paras ofthe agreement is reproduced here under :- “Whereas : –Asian Paints has been inter alia carrying on the businessof manufacturing, selling and distributing paints, varnishes,primers and the like as manufacturers, seller and distributorsthroughout India. –Asian Paints is desirous of promoting its brands andproducts through a network of retail outlets wherein the end consumers can have a complete experience of the Asian Paintscolours and can understand the various products, theirattributes, educate themselves through the colour consultants andother literature on paints. –For the aforementioned purpose Asian Paints intends toenter into an agreement with its dealers, whereby the dealer shallprovide Asian Paints a space in the dealer's shop to be exclusivelyused by Asian Paints for installing its décor, designs, creative andconcepts (“Designed Shop Area”) –The Dealer is in the business of sale and distribution ofpaints for several years with familiarity, experience, and goodwillin the retail market and has represented to Asian Paints that ithas the necessary Infrastructure, financial resources inter aliaspace shop storage facilities, personnel and experience toundertake the intended arrangement and business of paints. –The Dealer has further represented to Asian Paints that heis in lawful possession of the premises situated at 32, Mill Road,Coimbatore, Tamil Nadu- 641001 for 50 years (approx.), havinga total area and measuring approximately 2861 sq.feet free fromall encumbrances in respect of which the Confirming Party is anOwner thereof; –The Dealer has approached Asian Paints and agreed tostock, promote and sell the products of Asian Paints from theDesignated Shop Area, by installing Asian Paints Decor, design,creatives and concepts; –Based on the above representation of the Dealer, AsianPaints hereby agrees to associate with Dealer and the Dealeragrees to promote Asian Paints products through the DesignatedShop Area, make displays and the Dealer has agreed to thisbusiness arrangement on the terms and conditions appearinghereunder; NOW THIS AGREEMENT WITNESSETH THAT for and inconsideration of the mutual covenants and promises hereinafterset out the parties hereto agree as follows; (1)TERM : –This Agreement is for a period of 5 years commencing on1[st] February, 2014 and terminating on 31[st] January, 2019 unlessotherwise terminated in writing by the parties. This Agreementmay be renewed for such period and upon such terms andconditions as may be mutually agreed to by both the parties. (2)COMMERCIAL UNDERSTANDING : – The Parties hereby agree that the said arrangement underthis Agreement is for brand promotion activity of Asian Paintsand through which the Dealer shall also benefit by way ofconsumer mileage. – For the above purpose, the parties agree by way of sharingof costs incurred for the setting up of the Designated Shop areaand the parties shall share the cost in certain proportion subjectto Asian Paint's commitment being up to Rs.45,00,000/- (RupeesForty Five Lacs only). – The parties agree that the total estimated cost for thepurpose of setting up the Designated Shop Area shall beapproximately Rs.60,00,000/- (Rupees Sixty lacs only). The dealer contribution will be 25% of the total cost and totalliability of Asian Paints shall be subject to a maximum of Rs.45lakhs. – The Parties hereby agree that the said arrangement underthis Agreement is for brand promotion activity of Asian Paintsand through which the Dealer shall also benefit by way ofconsumer mileage. – For the above purpose, the parties agree by way of sharingof costs incurred for the setting up of the Designated Shop areaand the parties shall share the cost in certain proportion subjectto Asian Paint's commitment being up to Rs.45,00,000/- (RupeesForty Five Lacs only). – The parties agree that the total estimated cost for thepurpose of setting up the Designated Shop Area shall beapproximately Rs.60,00,000/- (Rupees Sixty lacs only). The dealer contribution will be 25% of the total cost and totalliability of Asian Paints shall be subject to a maximum of Rs.45lakhs. –Upon the instructions of Asian Paints, the Dealer shall payAsian Paints a sum amounting to 255 of the entire constructioncost in terms of the Bills of Quantity (BOQ) as detailed in theAnnexure herein. The payment required to be made by theDealer under this arrangement shall be as under: 7.5 lacs Store Handover date:Balance amount payable by Dealer In addition to the above, the Dealer shall share 50% per cent ofthe cost (Labour + Material) towards the repair / rectification ofdécor elements that may be incurred during the term of theAgreement, unless there is a generic defect in which case AsianPaints will bear the entire cost. (3)OBLIGATION AND CONVENANTS OF THE DEALER : – The Dealer shall provide a minimum of 25 sq.meter areain his shop as the Designated Shop Area to Asian Paints, asidentified by Asian Paints to install its décor, displays, designs,visuals in the Dealer's shop which is intended to give the endconsumer a complete experience, a look and feel of the paintswould in an innovative way. This area shall inter alia display the “finishes books”, brochures, literatures and advertisements,counters called as 'Try & Decide counter', 'Be inspired Area' andChoose Your Finish Bar'. Apart from the above counters, theDealer shall also provide Asian Paints a separate contractortransaction area called as the 'Decorator Express Area' measuringa minimum of 10 sq. meters. –The Dealer shall hand over peaceful and vacant possessionof his Shop premises to the contractors and the consultants ofAsian Paints so as to enable them to do the necessary demolition,construction / fabrication and installation work in terms of thisAgreement. –The Dealer shall get his Shop premises and the DesignatedShop Area constructed designed and decorated in accordancewith and in the manner suggested by Asian Paints and itsconsultants / contractors. – The Inspiration Area shall be continuous and must haveeasy access to the customer. – The Dealer must not use the Designated Shop Area in anyother manner than as specified by Asian Paints. – Any other product or display material shall be kept out ofthe Designated Shop Area unless specified by Asian Paints. –The Designated Shop Area shall not be used for display ofany other companies' products for either stocking or display. – The dealer shall adhere to the design & process ofconstruction / fabrication as mutually agreed before the workcommences. Any change in the same can be done only at thebehest of Asian Paints. – The dealer shall permit and cooperate in any everymanner with the consultants and contractors of Asian Paints andtheir men / employees and agents to execute the construction /fabrication work inter alia the designing erection and installationof graphics, decors, visuals etc. – The Dealer shall not share the design of the shop or anyother plans with anyone not employed by Asian Paints unlessspecified under written instructions of Asian Paints. – All running & operational costs including but not limitedto any electric bills, water and sewerage taxes if any for the termof the Agreement shall be borne by the Dealer. – The dealer shall permit and cooperate in any everymanner with the consultants and contractors of Asian Paints andtheir men / employees and agents to execute the construction /fabrication work inter alia the designing erection and installationof graphics, decors, visuals etc. – The Dealer shall not share the design of the shop or anyother plans with anyone not employed by Asian Paints unlessspecified under written instructions of Asian Paints. – All running & operational costs including but not limitedto any electric bills, water and sewerage taxes if any for the termof the Agreement shall be borne by the Dealer. – The Dealer shall use the décor elements as per the trainingmanual provided to the Dealer by Asian Paints and the Dealershall not change, after or append any décor elements installed by Asian Paints during the subsistence of this Agreement. – The Dealer shall maintain the décor elements and ensuresafeguard of the same against any damages, (normal wear andtear excepted ). – Besides the above-mentioned activities, Asian Paints shall,through the Designated Shop Area, offer other services such ascolour consultancy & colour visualizer and such other services tocustomers as may be introduced by Asian Paints from time totime. The cost of the colour consultant appointed by AsianPaint's Contractor will be borne as follows: YearCost borne by dealerCost borne by APL150% of the total expenses50% of the total expenses250% of the total expenses50% of the total expenses350% of the total expenses50% of the total expenses450% of the total expenses50% of the total expenses550% of the total expenses50% of the total expenses The Dealer also agrees that the amount payable by him will betaken by means of an auto Debit Note every month, immediatelystarting from the handover date. –The Dealer shall cooperate, avail and facilitate AsianPaints in order to enable Asian Paints to offer services to its endconsumers in every manner possible. The usage of these serviceswill be as per the terms & conditions specified by Asian Paintsfrom time to time. – The Dealer shall be under a strict obligation, not to alter /tamper/ make changes in the construction, fabrication, designs,displays made and installed by Asian Paints during thesubsistence of this Agreement unless otherwise permitted by AsianPaints. Any such changes, alterations or distortions or failure tomake and sustain the arrangements in respect of the DesignatedShop Area shall entail termination of this Agreement and theDealer shall be liable to make good every loss and damagesustained by Asian Paints in this regard. –The Dealer shall provide an unrestricted and unlimitedaccess to any of the Asian Paints employees, agents andrepresentatives and the records thereto at all reasonable times. – The Dealer shall not charge in excess of the MRP declaredby Asian Paints upon its products for the facilities provided to the customers in the Designated Store Area. – The Dealer shall not be entitled to inter alia any specialprivileges, prerogatives, benefits discounts, rebates or schemes ascompared to other dealers by virtue of this Agreement.” 2.2.On perusal of the agreement, it clearly emerges that theassessee company and the dealer of the assessee has entered intoan agreement to create a 'fixed assets' for promoting theirbusiness Interest under the concept of “Colour Idea Store”. Asper the agreement, the assessee company and dealer shares theexpenses incurred for the same. Further, the logic of the assesseethat the 'assets' is not at the premise assessee, it is submitted that,nowhere, in the act, there is any per-condition of owning thepremise for capitalizing the furniture & fixture. customers in the Designated Store Area. – The Dealer shall not be entitled to inter alia any specialprivileges, prerogatives, benefits discounts, rebates or schemes ascompared to other dealers by virtue of this Agreement.” 2.2.On perusal of the agreement, it clearly emerges that theassessee company and the dealer of the assessee has entered intoan agreement to create a 'fixed assets' for promoting theirbusiness Interest under the concept of “Colour Idea Store”. Asper the agreement, the assessee company and dealer shares theexpenses incurred for the same. Further, the logic of the assesseethat the 'assets' is not at the premise assessee, it is submitted that,nowhere, in the act, there is any per-condition of owning thepremise for capitalizing the furniture & fixture. 2.3.In view of above, the expenses for “Colour Idea Store”incurred by the assessed company was disallowed as revenueexpenditure and allowed as capital expenditure to be capitalizedas “Furniture & Fixture”. Accordingly, the amount ofRs.32,44,46,533/- was disallowed and depreciation ofRs.3,24,44,653/- (10% of 32,44,46,533/-) was allowed to theassessee. The net dis-allowance works out to Rs.29,20,01,880/-.3.As discussed with the assessee,it is also found that theassessee has incurred expenses of Rs.3,24,09,060/- under head“Colour Idea Concept” in A.Y. 2011-12 and debited it to P&L A/cRs.282,35,00,000/- under the head “Advertisement & Salespromotion Expenses” includes 'Colour Idea Concept' expenses ofRs.3,24,09,060/-. As discussed above in para 2 above, theexpenses on account of “Colour Idea Concept” is a capital innature, therefore, the amount of Rs.3,24,09,060/-) should bedisallowed and depreciation of Rs.32,40,906/- (10% of32,44,46,533/-) to be allowed to the assessee. Accordingly, thenet excess allowance works out to Rs.2,91,68,154/-. 4.On perusal of assessment record of assessee for A.Y. 2011-12, it is seen that during the course of assessment proceedings forA.Y. 2011-12, the assessee has not submitted the bifurcateddetails of “Advertisement & Sales promotion Expenses”.Therefore, it is a new information and evidence for the AssessingOfficer found during the course of assessment proceedings of A.Y.2015-16. 5.In view of the above, the undersigned has reason to believe that the income exceeding Rs.1,00,000/- has escaped assessmentwithin the meaning of Section 147 of the Act. 6.In view of the same, notice u/s 148 is issued after approvalof CIT-LTU, Mumbai vide letter No.CIT(LTU)/AsianPaints/147/2017-18 dated 27.03.2018.” 6.The petitioners filed its objections to the reopening notice byletter dated 1[st] August, 2018. These objections were rejected by orderdated 18[th] September, 2018 of the Assessing Officer. 7.From the reasons recorded in support of the impugned noticedated 28[th] March, 2018, the following undisputed facts emerge :- (a)the impugned notice is beyond the period of 4 years from the endof the relevant assessment year; (b)the regular assessment proceedings were completed underSection 143(3) of the Act; (c)the material which forms the basis for the impugned notice is anassessment order passed for Assessment Year 2015-16; and (d)the order for Assessment Year 2015-16 came to be passed on thebasis of an agreement dated 6[th] March, 2014 between the petitionerassessee and its dealers. 8.On the aforesaid facts, Mr. Agarwal, learned Counsel appearing in support of the petition submits that the impugned notice is withoutjurisdiction for the following reasons :- (a)The impugned notice has been issued beyond the period of 4years from the end of the relevant assessment year in respect of anassessment completed under Section 143(3) of the Act. Thus, in theabsence of any failure on the part of the assessee to fully and trulydisclose all material facts necessary for the assessment, the notice is hitby the first proviso to Section 147 of the Act; (d)the order for Assessment Year 2015-16 came to be passed on thebasis of an agreement dated 6[th] March, 2014 between the petitionerassessee and its dealers. 8.On the aforesaid facts, Mr. Agarwal, learned Counsel appearing in support of the petition submits that the impugned notice is withoutjurisdiction for the following reasons :- (a)The impugned notice has been issued beyond the period of 4years from the end of the relevant assessment year in respect of anassessment completed under Section 143(3) of the Act. Thus, in theabsence of any failure on the part of the assessee to fully and trulydisclose all material facts necessary for the assessment, the notice is hitby the first proviso to Section 147 of the Act; (b)The Assessing Officer, during the course of assessmentproceedings had an occasion to consider the petitioners' submissiondated 16[th] September, 2014 in response to the query of the AssessingOfficer, wherein a specific reference was made to the advertisement andsales promotion expenses by giving its breakup. This breakup indicatedthat the expenses incurred towards “Colour Idea Stores” amongst otherexpenses. This break up was considered as the assessment order underSection 143(3) of the Act, disallowed certain expenditure which wasclaimed as a part of the advertisement and sales promotion expenses.Thus, indicating the application of mind to the appellant's claim whilepassing an order under Section 143(3) of the Act; and (c)Lastly, the concept of “Colour Idea Stores” is that the petitionerassessee undertake to share a part of the renovation expenses of its dealers' shops so as to attract customers to purchase its products.These shops, where renovation is carried out are not owned by thepetitioner and, therefore, there could be no question of same beingclassified as a capital expenditure as held by the Supreme Court in Commissioner of Income Tax Vs. Associated Cement Companies Ltd. (1988) 172 ITR 257. Thus, it is submitted that the Assessing Officerhad no reason to believe that income chargeable to tax has escapedassessment. 9.On the other hand, Mr. Suresh Kumar learned Counsel appearingin support of the petition submits as under :- (a)that the impugned notice is within jurisdiction as the AssessingOfficer had not formed any opinion on this issue while passing theassessment order dated 18[th] March, 2015 under Section 143(3) of theAct; and (b)the Assessing Officer should be allowed to complete theassessment proceedings where the contentions on merits would beconsidered and justice done. 10.As noted above, the impugned notice dated 28[th] March, 2018 forreopening of assessment has been issued beyond the period of 4 years from the end of the relevant assessment year i.e. AY 2011-12 in respectof assessment completed under Section 143(3) of the Act. Thus, thefirst proviso to Section 147 of the Act would clearly arise forconsideration and application, if there has been no failure on the part ofthe petitioner assessee to disclose fully and truly all material factsnecessary for assessment. In the present facts, we note that in itsreturn of income the petitioner had claimed the expenditure incurredon “Colour Idea Stores” as a part of its Advertisement and SalesPromotion expenses. During the regular assessment proceedings underSection 143(3) of the Act, the Assessing Officer had occasion toexamine the petitioner's claim for expenses in respect of “Colour IdeaStore” as a part of its advertisement and sales promotion expenses.Thus, there was a complete disclosure of all primary material facts onthe part of the petitioner. (See Calcutta Discount Co. Vs. ITO, 41 ITR191). Therefore, no failure to disclose all fully and truly material factsnecessary for assessment. Thus, on the above ground itself theimpugned notice is hit by the proviso to Section 147 of the Act and iswithout jurisdiction. 11. In any case, the application of mind to these facts on the part ofthe Assessing Officer can be inferred from the fact that the statement constituting the breakup of the total expenditure incurred on sales andpromotions was considered in the assessment order as some of theexpenses forming part of the breakup of sales and promotions expenseshad been disallowed in the assessment order dated 18[th] March, 2015passed under Section 143(3) of the Act. This would clearly indicatethat the impugned notice has been issued on account of change ofopinion and it is an attempt to review the Assessment Order dated 18[th]March, 2015 passed under Section 143(3) of the Act. 12.Besides, we do note that the Assessing Officer is entitled to relyupon the order passed in assessment proceedings for the subsequentyear, as tangible material to initiate reassessment proceedings.However, the tangible material so obtained must be processed i.e. itsapplicability to the assessee for the subject assessment year is to beexamined so as to form a reasonable belief that income chargeable totax has escaped assessment. The tangible material in the assessmentorder for A.Y. 2015-16 was the agreement dated 6[th] March, 2014. Thisis an agreement post the period with which the impugned notice isconcerned. This, by itself could not form the basis for the AssessingOfficer to have come to a reasonable belief that income chargeable totax has escaped assessment for the subject assessment year 2011-12. Thus, in these facts, the Assessing Officer has not himself come to thereasonable belief that income chargeable to tax has escaped assessmentTherefore, on this ground also the impugned notice is unsustainable. 13.So far as the last submission on the part of the petitioner viz. thatas the asset is not owned by the petitioner, the expenditure cannot beon capital account, is not examined in the context of the present facts.This as it is not necessary, as earlier submissions are sufficient todispose of the petitioner's challenge to the impugned notice dated 28[th]March, 2018 seeking to reopen the assessment proceedings forAssessment Year 2011-12. 14.For the above reasons, the impugned notice is quashed as beingwithout jurisdiction. 15.Petition allowed. No order as to costs. (M.S. SANKLECHA, J.) (AKIL KURESHI, J.)