Multiscreen Media Private Limited Vs The Union of India (UOI) and The Assistant Commissioner of Income Tax, Range 11(1)

D.Y. Chandrachud, J.@mdashRule, by consent and on the request of Counsel made returnable forthwith. Counsel for the respondents waives service. With the consent of counsel, the petition is taken up for final hearing.

2. The petitioner is engaged inter alia in the business of providing audiovisual television Software (''content''), films, events and other like activities. Subscription income is received from distribution of channels. The petitioner also receives income from advertisements, sales and agency fees from marketing of airtime. As a content provider, the petitioner develops the content in-house or gets it developed from other software production houses under its supervision and control. The major source of income is stated to be the subscription income received by the petitioner for the distribution of television channels. The petitioner also acts as an agent for foreign television companies for canvassing the sale of airtime for channels for which it receives agency fees.

3. The bone of contention in the present case relates to the reopening of assessment for assessment year 2004-05. For assessment year 2004-05, the petitioner claimed a deduction in respect of certain expenditure pertaining to advertisements, sales promotion, market research and publicity expenses on the ground that it was wholly and exclusively incurred for the purpose of business u/s 37(1) of the Income Tax Act, 1961. The return of income for assessment year 2004-05 was taken up for scrutiny assessment. The assessment proceedings were concluded on 22nd December, 2006. The Assessing Office allowed to the petitioner a deduction on account of expenditure incurred towards advertisements, publicity and market research.

4. On 25th March, 2009 the Assessing Officer issued a notice u/s 148 proposing to reopen the assessment proceedings for assessment year 2004-05 on the ground that he had reason to believe that the income of the petitioner chargeable to tax had escaped assessment. On 8th July, 2009, the Assessing Officer communicated his reasons for reopening the assessment. The reasons recorded by the Assessing Officer state that during the course of assessment proceedings of the subsequent assessment year, 2005-06, the Assessing Officer had made a specific addition under the head of advertisements, sales promotion and market research expenses, wherein an amount of Rs. 32.49 crores was added back to the income of the assessee. The reasons which have been recorded by the Assessing Officer while reopening the assessment for assessment 2005-06 have been adverted to. The Assessing officer on the reasons recorded for the subsequent assessment year held that a similar issue in regard to advertisement and publicity expenses is raised in assessment year 2004-05. During the assessment year, the petitioner debited an amount of Rs. 26,75 crores under the head of advertisement and publicity expenses, Rs. 2.83 crores for market research expenses and Rs. 6.42 crores to dealer''s incentives. Consequently, selling and distribution charges amounting in all to Rs. 26.01 crores had been debited. During the course of scrutiny assessment, since the assessee had not made any specific representation in that regard, the Assessing Officer had no occasion to take any opinion on whether a disallowance was called for. The Assessing Officer recorded that expenses amounting to 81.25% of the aforesaid sum debited need to be disallowed in accordance with the findings of the Assessing Officer for assessment year 2005-06. On this basis, he formed a reason to believe, that taxable income of the assessee had escaped assessment and reopened the assessment u/s 147.

5. Learned Counsel appearing on behalf of the petitioner in support of the challenge to the validity of the notice u/s 148, submitted that during the course of scrutiny assessment, a query was raised by the Assessing Officer on 7th September, 2006 by which the petitioner was called upon to disclose the nature of the business and details of expenses debited inter alia towards market research. In pursuance thereto, the petitioner submitted a reply on 22nd November, 2006 explaining the nature of its business and furnished a break-up of market research expenses. Thereupon, by a communication dated 15th November, 2006, the Assessing Officer called upon the assessee to furnish details/break-up of advertisement and sales promotion expenses together with a justification for the claim. This was replied to by the petitioner on 29th November, 2006. The petitioner submitted that it incurred the advertisements and sales promotion expenses in the normal course of its business of, inter alia, distribution of TV channels and canvasing for airtime of TV channels in India. These expenses were with a view to increase the turnover of the company which in turn has increased its profitability. On the basis of this material, it was submitted that an order of assessment was passed u/s 143(3). The Assessing Officer was, therefore, not within his jurisdiction to issue a notice of reassessment u/s 148 on the basis of the same facts. Undoubtedly, the Assessing Officer had for assessment year 2005-06 made a disallowance of the expenditure incurred on advertisements and sales promotion, save and except to the extent of 18.75% but this would not justify the Assessing Officer in seeking to reopen assessment for assessment year 2004-05, there being no fresh material for the Assessing Officer to do so. In the absence of fresh material, it is urged that the action of the Assessing Officer would only amount to a change of opinion, which is not permissible under the substantive provisions of Section 147.

6. Section 147 enables the Assessing Officer to assess or reassess any income chargeable to tax which he has reason to believe has escaped assessment for an assessment year. The proviso to Section 147 imposes certain additional requirements where an assessment inter alia is sought to be opened beyond a period of four years from the end of the relevant assessment year. In the present case, the exercise of power is within a period of four years and, therefore, the requirements of the proviso are not attracted. Explanation 2 to Section 147 provides a deeming fiction of cases were income chargeable to tax would be treated to have escaped assessment. Among them in Clause (c) of Explanation 2 are cases where an assessment has been made, but (i) income chargeable to tax has been under-assessed; or (ii) such income has been assessed at too low a rate; or (iii) such income has been made the subject of excessive relief under the Act; or (iv) excessive loss or depreciation allowance or any other allowance under the Act has been computed. Where the Assessing Officer purports to exercise power u/s 147 within a period of four years of the end of the relevant assessment year, the condition precedent to the exercise of the power, is the existence of a reason to believe that any income chargeable to tax has escaped assessment. The expression ''reason to believe'' must obviously be that of a prudent person and it is on the basis of the reasons recorded by the Assessing Officer that the question as to whether there was a reason to believe that income has escaped assessment, has to be determined. At the same time, the sufficiency of the reasons for reopening an assessment does not fall for determination, at the stage of a reopening of assessment. When the Court is concerned with a challenge to a notice u/s 148, the issue is not as to whether it can be conclusively demonstrated that income had escaped assessment, but whether as a matter of fact, there was a reason to believe that this was so, to justify a recourse to the power u/s 147. The power u/s 147 cannot be exercised on a mere change of opinion. The requirement that reasons be recorded in Section 148 is a safeguard that ensures against an arbitrary exercise of power. Similarly, judicially evolved doctrine asserts that a mere change of opinion cannot justify recourse to the power u/s 147. This is intended to ensure that the power is exercised for valid reasons when there is tangible material for the Assessing Officer to do so. The test of ''tangible material'', it may be noted, has been enunciated in a judgment of the Supreme Court in Commissioner of Income Tax, Delhi Vs. Kelvinator of India Limited, , wherein the Hon''ble Mr. Justice S.H. Kapadia, speaking for a Bench of the Supreme Court held thus:

...one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. But reassessment has to be based on fulfilment of certain pre-conditions and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, 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. Reasons must have a link with the formation of the belief....

7. In the present case, recourse to the provisions of Section 147 has been taken on the ground that during the course of assessment proceedings for the next assessment year, namely assessment year 2005-06, the Assessing Officer specifically made a disallowance in respect of a part of the expenditure claimed to have been incurred by the assessee towards advertisements and publicity expenses. The Assessing Officer while seeking to reopen an assessment u/s 147 is not precluded upon relying on an order of assessment passed for a subsequent assessment year, where additional material has emerged before the Assessing Officer to lead to the formation of a belief that income chargeable to tax had escaped assessment. In Sri Krishna Private Ltd. Etc. Vs. I.T.O., Calcutta and Others, , in his return of income filed for assessment year 1959-60, the Assessee had shown certain Hundi loans which were stated to have been taken from a number of persons. The Assessing Officer accepted the averment and made an assessment. During assessment proceedings for the successive year, 1960-61, the assessee again showed Hundi loans in a sum exceeding Rs. 17 lacs. The Assessing Officer made an inquiry and found that many of the loans were bogus and that some of the alleged loans were by erstwhile directors and shareholders of the assessee. Loans of approximately Rs. 11.15 lacs were not established to be genuine and the amount was added back as income from undisclosed sources. On that basis, notice was issued u/s 148 seeking to reassess the income for assessment year 1959-60. A Single Judge of the Calcutta High Court allowed the petition filed by the assessee and quashed the validity of the notice, but on appeal, the Division Bench set aside the judgment of the Single Judge. The Supreme Court confirmed the judgment of the Division Bench of the Calcutta High Court. The Supreme Court held that at that stage it was only a reopening of an assessment and while it was true that the Assessing Officer could have investigated the truth of the assertion of the assessee, which he actually did in the subsequent assessment year, the question as to whether the loan alleged to have been taken by the assessee was true or false, was a material fact and not a mere inference to be drawn from given facts. The Supreme Court held that this would furnish a reasonable ground to the Assessing Officer to form a belief that on account of the failure of the assessee to disclose all material facts, income had escaped assessment. The Court emphasised that at that stage, it was only required to consider whether there are reasonable grounds for the Assessing Officer to believe and not whether escapement of income had been established. In a subsequent judgment of the Supreme Court in Sumanth Ramanujam and Another Vs. Commissioner of Income Tax, , which was a Civil Appeal from the judgment of the Punjab & Haryana High Court in an Income Tax Reference, the Supreme Court held that there was material on the basis of which the Assessing Officer can proceed to reopen the case and it was not a case of a mere change of opinion. Merely because the case of the assessee was accepted as correct in the original assessment for the assessment year in question, that would not preclude the Income Tax Officer to reopen the assessment for an earlier year on the basis of a finding of fact made on the basis of fresh material in the course of an assessment for the next assessment year. The judgment in Ess Ess Kay Engineering (supra) hence lays down the principle of law that it would be open to the Assessing Officer to reopen an assessment, based on a finding of fact made on the basis of fresh material gathered in the course of assessment for a subsequent assessment year. The test in these cases, as the subsequent judgment in Kelvinator (supra) lays down is whether there is tangible material for the Assessing Officer to do so.

8. In a judgment of a Division Bench of this Court in Anusandhan Investments Ltd. Vs. M.R. Singh, Deputy Commissioner of Income Tax and Another, , one of us (Mr. Justice J.P. Devadhar) speaking for a Division Bench noted that it is a well established position in law that an assessment can be reopened on the basis of information contained in an assessment of a subsequent year. In that case, the question was whether reopening of assessment for assessment year 1992-93 was justified. In the assessment order for assessment year 1993-94, the Assessing Officer held that the sale of shares in pursuance to an agreement dated 3rd January, 1992 took place on the same day and capital gains in respect thereof were leviable for assessment year 1992-93. The issue regarding capital gains arising from the sale of shares pursuant to the agreement was however neither raised nor discussed in the assessment order for assessment year 1992-93. Consequently reopening of assessment based on assessment year 1993-94, wherein it was held that a relationship of a 100 per cent holding subsidiary company was acquired only with the intention of evading capital gains could not be faulted.

9. In the judgment of a Division Bench of this Court in Siemens Information System Ltd. Vs. The Assistant Commissioner of Income Tax 7(2), Commissioner of Income Tax-7 and Union of India (UOI), , an assessment was sought to be reopened for assessment year 2001-02 on the basis of an assessment order that was passed for assessment year 2003-04. The Division Bench noted that the reason to believe that income had escaped assessment was based on the finding that losses incurred in units which were not eligible for deduction under Sections 10A & 10B had to be first set off against the profits of the units which are eligible for deduction and only the balance profits were eligible for deduction u/s 10A. The Division Bench held that while furnishing those reasons, the Assessing Officer had in assessment year 2003-04 merely disagreed with the approach of the Assessing Officer who made an assessment for assessment year 2001-02. The Division Bench clarified that this was not a case where any other material had been disclosed or where new material had come to attention or where this Court or the Supreme Court had taken a view on the issue. The Division Bench held that merely because the second Assessing Officer differs with the opinion of the earlier Assessing Officer on the interpretation of the statutory provision without any additional material, that would not justify recourse to the provisions of Section 147 and a mere change of opinion on an interpretation of a provision by itself without anything more, cannot give rise to ''reason to believe''. The judgment of the Division Bench in Siemens Information Ltd. (supra), therefore, does not state as an absolute principle of law that an Assessing Officer would not be entitled to seek recourse to the power to reopen an assessment u/s 147 on the basis of an assessment made for a subsequent assessment year, The judgment of the Division Bench cannot be construed to lay down a proposition of law inconsistent with the law down by the Supreme Court in Sri krishna Pvt. Ltd. (supra) and Ess Ess Kay Engineering (supra). In fact, as already noted earlier, the judgment in Ess Ess Kay Engineering held that the Assessing Officer is not precluded from reopening the assessment of an earlier assessment year on the basis of his finding of fact made, on the basis of fresh material in the course of an assessment in the next assessment year. The judgment of the Division bench in Siemens Information (supra) when properly considered, involved a case where recourse to the provision for reopening an assessment was taken in the absence of any additional material. The Supreme Court in Kelvinator (supra) observed that tangible material and not merely a change of opinion can entitle the Assessing Officer to take recourse to the power to reopen assessment. The emphasis is on ''mere'' in the phrase ''mere change of opinion''. A mere change of opinion is not enough. A change of opinion, in other words, is permissible, provided it is grounded on additional or tangible material. In the absence of any other fresh material, a change of opinion would amount to an exercise of a power akin to a review or re-appreciation and would be no more that what is described as a mere change of opinion.

10. In this background, the facts of the present case would have to be considered. During the course of proceedings for assessment year 2004-05, a query was addressed by the Assessing Officer on 7th September, 2006 inter alia requiring the assessee to make a disclosure of the nature of its business and details of the expenses towards market research. On 15th November, 2006, the assessee was directed to furnish a justification and details of expenditure towards advertisements and sales promotion expenses. The assessee furnished the break-up of the expenses incurred towards advertisements and sales promotion and an order of assessment was passed u/s 143(3). When the assessment proceedings for assessment year 2005-06 were taken up, the Assessing Officer by his letter dated 21st August, 2007 called up the assessee to furnish the ledger extracts of advertisements and sales promotion expenses/market research expenses. On 26th November, 2008 a notice was issued to the assessee u/s 142(1). The Annexure to the notice drew the attention of the assessee to the fact that the assessee had debited advertisements and sales promotion expenses of Rs. 39.99 crores; dealer''s incentives of Rs. 50.89 crores and market research expenses of Rs. 2.73 crores. The Assessing Officer noted that considering the fact that the programmes are aired by the channel, any ''upside'' in the revenues shall accrue to the Channel Company. The assessee was asked to explain why this amount should be allowed in the light of the absence of business expediency. The assessee was called upon to file a detailed explanation along with supporting documents. In the course of the assessment proceedings for assessment year 2005-06, the assessee had filed a detailed explanation before the Assessing Officer on 11/12/2008. The assessee set out its case in regard to the allowability of its advertisements and sales promotion expenses and dealer''s incentives expenses together with market research expenses u/s 37(1). The case of the assessee was that the entire expenses were incurred wholly and exclusively for the purpose of its business and it was essential for the assessee to incur the expenses so as to increase its own income by way of sale of content, distribution income, advertisements as well as agency fees. The case of the assessee, therefore, was that the entire expenditure should be allowed as deduction u/s 37(1) even though a third party, namely a Channel Company may have benefited from the same to a certain extent. The Assessing officer while passing the order of assessment for assessment year 2005-06 came to the conclusion after considering the submissions of the assessee that of the total expenses that were incurred, 18.75% would be allowed in the hands of the assessee while the balance shall be held as expenditure incurred on the behalf of the foreign principal of the assessee and was liable to be disallowed in the hands of the assessee. In the present case, we are not concerned with the merits of the claim of the assessee in regard to whether the expenditure that was incurred was wholly and exclusively for the purpose of the business of the assessee. What is material is that on the basis of a detailed inquiry which took place during the course of assessment year 2005-06, the claim of the assessee of deduction of the entire expenses was not accepted and disallowance was made to the extent of expenditure incurred over and above 18.75%. The Assessing Officer did so on the basis of fresh material which came before him in view of the notice dated 26th November, 2008 in pursuance to which the assessee filed a detailed representation elucidating the relevant particulars of the business of the assessee and the reasons for the expenditure. Whether the Assessing Officer was justified in the decision which he took for assessment year 2005-06 is again not a matter to be considered at this stage of the proceedings. The point is that on the basis of the additional material which was available on record, the Assessing officer issued a notice for reopening the assessment for assessment year 2004-05. In our considered view, the Assessing officer did have tangible material to reopen the assessment u/s 147 of the Act and to form a reason to believe that income had escaped assessment. Clause (iv)(c) of Explanation 2 to Section 147 creates a deeming fiction where though the assessment has been made, income chargeable to tax is under assessed. In such a case, law deems that income chargeable to tax has escaped assessment. For these reasons, we are of the view that recourse to the provisions of Section 147 cannot be faulted.

11. While concluding, we would however reiterate that the question as to whether the assessee would be entitled to a deduction in respect of the entire expenses claimed u/s 37(1) would be a matter which would fall for determination on merits according to law and the observations contained in this judgment should not be considered as an expression of any opinion on the merits of that issue.

12. For all the aforesaid reasons, we are of the view that the exercise of writ jurisdiction would not be warranted. The petition is dismissed. There shall be no order as to costs.