GAIL (INDIA) LTD.,NEW DELHI vs. CIT, NEW DELHI

Though assessee has raised as many as three grounds but all the grounds are against the order u/s 263 of the Income Tax Act arguing that the LD CIT has erred in assuming jurisdiction u/s 263 of the act as order passed by ld AO is not erroneous.

The brief facts of the case is that the assessee is engaged in the business of transmission and distribution of gas and it filed its return of income on 30.10.2007 declaring total income of Rs. 23183063680/-. The assessment was framed u/s 143(3) of the Act on 31.12.2009 determining taxable income of Rs. 26060583882/-.

Subsequently, show cause notice u/s 263 dated 04.02.2011 was issued to the assessee on the issue of:- a. allowability of advertisement and publicity expenditure of Rs. 146600000/-. The show-cause notice says that the expenditure incurred gave enduring benefit which would be realized over a longer period and therefore, this expenditure should have been treated as deferred revenue expenditure and only 1/5 of the same should have been allowed as deduction. The ld AO allowed it fully and therefore the order is erroneous. b. allowability of corporate social responsibility expenditure of Rs. 85314703/-. The notice says that since the said expenditure is not related to business it is non business expenditure and hence not allowable u/s 37 of the Act and therefore, as the same is not Page 3 of 9 disallowed by ld Assessing Officer, therefore order is erroneous to that extent. As the other issues in show cause notices were not covered in his order, therefore same are not discussed.

Consequently, the ld CIT after considering the five letters in reply to the show cause notice proceeded to pass order u/s 263 of the Act after considering the comments of the Assessing Officer. The ld CIT held:- i. on the issue of advertisement and publicity that the amounts spent by the assessee under this head was not actually spent only on advertisement but for exhibition, campaigns, corporate films etc. which resulted into enduring benefit to be realized over a longer period and further the AO has not caused proper enquiries to ascertain the revenue nature of the claim but accepted it without a verification. Therefore, the order was found to be erroneous and prejudicial to the interest of the revenue and it was set aside with a direction to the AO to cause sufficient enquiries in order to ascertain the nature of expenditure and to make disallowance of expenses found to be capital in nature. ii. On the issue of corporate social responsibility expenditure that these expenses comprising of expenditure on helping poor children and medical care and CSR related activities are not business expenses and hence this deserves to be disallowed and added to the income of the assessee. The assessee aggrieved with the order has filed this appeal before us challenging the order passed u/s 263 of the Act.

Against this assessee has filed this appeal before us.

Assailing the above order Ld AR first referred to the show cause notice u/s 263 of the Act at page 236 and 237 of the Paper Book and then took us to reply dated 06.09.2011 submitted before the ld CIT stating that complete details of advertisement and publicity expenditure are available. It was further submitted that CSR expenditure incurred by the assessee are in relation to legal obligation cast upon the assessee because of its status as Navratna Company in pursuance of the guidelines issued by concerned Ministry of Govt. of India and therefore, there is no error in the order of the ld Assessing Officer in allowing those expenditure. Assailing proper inquiry, On the issue of sales advertisement and publicity expenditure he referred to Page 4 of 9 the letter dated 27.05.2011 submitted before the ld CIT submitting that the details were provided to the ld AO on 18.11.2009 and such expenditure were allowed after proper verification by the Assessing Officer. He further stated that such expenditure is not all capital in nature as there is no enduring benefit arising to the assessee. He relied on the decision of the Hon’ble Delhi High Court in case of CIT Vs. CITI Financial Consumer Finance Ltd. 2011 TIOL 309 (HC) (Del). He further referred to the letter dated 06.06.2011 wherein the details of advertisement expenditure was submitted to show that it is not capital in nature. He further referred to letter dated 08.08.2011 wherein various arguments with respect to the order u/s 263 were raised. He further submitted that the order u/s 263 is bad in law in view of the fact that there is no error in the assessment order in allowing both the expenses as deductible and none of them is disallowable. He further submitted that LD CIT has raised this issue which was not put to notice to the assessee at the time of initiating proceedings u/s 263 of the Act. For this he submitted that on the advertisement expenditure it was stated in notice as deferred revenue expenditure whereas the order u/s 263 says that they are capital in nature. He further submitted that once an issue has been examined by the Assessing Officer the ld CIT cannot set aside the issue to the Assessing Officer to make an enquiry in a particular manner, in nutshell he submitted that the AO allowed the expenditure after proper enquiry and for this he relied on the letter dated 10.11.2009 of the AO and letter dated 18.11.2009 by the assessee during the course of assessment proceedings. He further neither submitted that expenditure are allowable and are not capital in nature nor incurred for non-business purposes. He further argued that in case the issue is debatable, the provisions of section 263 cannot be exercised. He further submitted that there is no concept of deferred revenue expenditure under the Income Tax Act with respect to advertisement and publicity expenditure . Therefore according to him the order of the LD AO is correct and there is no error and also passed after due inquiry. Hence on this count it cannot be revised u/s 263 by ld CIT. On CSR expenditure he submitted they are held to be allowable by many courts. He further submitted that the view taken by the Assessing Officer cannot be said to be unsustainable and Page 5 of 9 therefore the order u/s 263 is not a valid order. He relied on plethora of case laws to support his argument.

The ld DR submitted that the AO has failed to do sufficient enquiry and also did not make proper enquiry, before allowing the expenditure and therefore, in absence of proper enquiry the ld CIT was justified in passing order u/s 263 of the Act.

We have carefully considered the rival contentions. The ld CIT with respect to the issue No.1, regarding allowance of advertisement and publicity expenditure, has held that advertisement expenditure incurred by the assessee has earned enduring benefit to the business of the assessee and ld AO has not caused proper enquiry to ascertain the revenue nature of the claim of the assessee and without verification has allowed the claim. It is demonstrated that Vide letter dated 10.11.2009 Assessing Officer asked the information vide para no. 12 about the break-up of advertisement and publicity expenditure. Vide letter dated 10.11.2009 assessee has submitted vide Sl No. 13 details of advertisement and publicity expenditure amounting to Rs. 14.65 crores and has also stated the amounts spent towards printing expenses, tender expenses, publicity, public exhibition, photographs, diaries, printing relation expenditure, media related expenditure, other tenders campaign expenditure, advertisement expenditure, sponsorships, corporate films etc. On examination of these details the ld Assessing Officer vide assessment order dated 31.12.2009 allowed them as deductible expenditure as nothing was disallowed. The expenses incurred by the assessee are purely of advertisement and publicity expenses, which are not shown to have resulted in to any enduring benefit. On examining the nature of expenditure submitted by the assessee we failed to understand how the same are not of revenue nature. The LD CIT has not given any reason for holding that they are of capital in nature. Further it is not a case of ‘No inquiry’. The ld CIT has stated that the ld Assessing Officer has not caused proper enquiries to ascertain the revenue nature of the claim of the expenses on account of advertisement. However, the order does not speak what are the enquiries that should have been done by the Assessing Officer which have not been done by him and therefore, allowance of the claim of the assessee of those expenditure is erroneous. Against this it is apparent that Assessing Officer has made some enquiry about the Page 6 of 9 allowability of this expenditure. On examining the nature of such expenditure, he concluded that this expenditure is allowable to the assessee. There is no material on record which suggests that such expenditure is capital in nature. According to us as in the original assessment this issue was duly examined and a conscious decision has been arrived by the ld AO at in allowing those expenditure. We do not subscribe to the view that provision of section 263 of the act can be used to make inquiry by the ld AO in the manner desired by the ld CIT and according to his satisfaction. Hon'ble Delhi High court in case of CIT V Sunbeam Auto Private Limited 332 ITR 167 has held that where it is found that opinion of the Assessing Officer in treating the expenditure as revenue expenditure was plausible and thus there was no material before the CIT to vary that opinion and ask for fresh inquiry. Further Honourable Delhi high court in CIT V Vodaphone Essar South Limited [212 taxmann 184] has held that CIT Could not chose to follow route of section 263 of the act to treat an expenditure as capital expenditure when ld AO has allowed these expenditure as revenue expenditure after due inquiry. Further, the assessee has stated that expenditure on publicity and advertisement is to be treated as revenue in nature and is allowable fully in the year in which it is incurred. The above proposition is also supported by several judicial pronouncements. Therefore, the view taken by the Assessing Officer in allowing this expenditure cannot be said unsustainable in law. In view of the above facts and also the decision of Honourable jurisdictional high court, we hold that order of the ld AO is not erroneous on this count. Therefore, when there is no element of un-sustainability in the order of the ld Assessing Officer in allowing the deduction of advertisement and sales promotion expenditure, we are of the view that ld CIT is no justified in invoking jurisdiction u/s 263 of the Act on this count.

Similarly, with respect to CSR expenditure vide Sl. No. 4 of the letter dated 10.11.2009 the details of other expenses wherein these expenses are grouped asking for the purpose and its nature and note on its allowability as revenue expenditure was asked. The same query was replied by para No. 4 of letter dated 10.11.2009 explained. In particular para the CSR expenses of Rs. 8.53 crores was mentioned. Therefore, it is apparent that specific questions on account of the claim of the expenses was raised by the Page 7 of 9 Assessing Officer during assessment proceedings and assessee replied to the queries of the Assessing Officer as desired by him. In view of this it is apparent that there was a specific query on the allowability of this expenditure which was raised by the Assessing Officer and same were replied by the assessee. Undisputedly it was not the case of ‘no Inquiry’. Therefore, it is apparent that during the course of assessment proceedings some inquiry was made by the Assessing Officer before these expenditures were allowed. Similar claims in the case of the assessee were also allowed in the previous years and subsequent years as stated by the Assessing Officer in his reply before the ld CIT which is reproduced at Page 22 and 23 of the order of the ld CIT u/s 263 of the Act wherein the Assessing Officer has stated that this proposal u/s 263 was made taking into consideration mistake reported by the audit party. As the above expense have been allowed to the assessee in past years as well as subsequent years by the revenue and no action u/s 263 or 147 of the Act has been initiated the issue has become settled in case of the assessee with respect to allowability of these expenses u/s 37 (1 ) of the act. On this score itself it cannot be said that expenditure incurred by the assessee on CSR activities following the government directive is not allowable. Further, as submitted by the ld AR that assessee is one of the Navratna PSU and is under legal obligation to incur these expenditures according to the policy of the Govt. of India. Such expenditure is held to be allowable as a business expenditure in several judicial precedents notably amongst them is Hon’ble Delhi High Court in case of CIT Vs. DTTDC Ltd 350 ITR 1 wherein, expenditure on development of flyovers etc was held to be allowable. Furthermore, coordinate bench in 96 ITD 186 has held that even implementation of the 20 points programmes expenditure are also allowable u/s 371(1) of the Income Tax Act in case of Public Sector Undertaking. In view of these judicial precedents the above expenditure on CSR activities of the assessee cannot be held to be disallowable. It was not shown before us that the view taken by the Assessing Officer is erroneous in allowing these expenditures. In view of above discussion it is apparent that the order of ld AO is not unsustainable in law, there are judicial precedents where in such claim is allowable in case of assessee, Therefore, and on this count the jurisdiction invoked by ld CIT u/s 263 of the Act is not sustainable.

Hon’ble Supreme court in case of CIT V Max India Limited has held that “2. At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd.(supra) this Court has taken the view that the phrase "prejudicial to the interest of the revenue" under section 263 has to be read in conjunction with the expression "erroneous" order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, when the Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. According to the learned Additional Solicitor General on interpretation of the provision of section 80HHC(3) as it then stood the view taken by the Assessing Officer was unsustainable in law and therefore the Commissioner was right in invoking section 263 of the Income-tax Act. In this connection he has further submitted that in fact 2005 amendment which is clarificatory and retrospective in nature itself indicates that the view taken by the Assessing Officer at the relevant time was unsustainable in law. We find no merit in the said contentions. Firstly, it is not in dispute when the Order of the Commissioner was passed there were two views on the word 'profit' in that section. The problem with section 80HHC is that it has been amended eleven times. Different views existed on the day when the Commissioner passed the above order. Moreover the mechanics of the section have become so complicated over the years that two views were inherently possible. Therefore, subsequent amendment in 2005 even though retrospective will not attract the provision of section 263 particularly when as stated above we have to take into account the position of law as it stood on the date when the Commissioner passed the order dated 5-3-1997 in purported exercise of his powers under section 263 of the Income-tax Act.”

In allowing both the above expenditure the ld AO has taken a plausible view. The ld CIT may not agree with the view taken by the ld AO. Anyway, this does not make the order passed by the ld Assessing Officer