Notional Rent Rejected

The dispute involved Procter & Gamble Home Products Ltd. and arose from long-standing litigation concerning office premises shared with group entities including Procter & Gamble Hygiene and Health Care Ltd. and Gillette India Ltd. The assessee owned office premises used jointly by group companies under cost-sharing arrangements designed to facilitate integrated marketing and operational coordination.

The Department treated the arrangement as a lease transaction and sought to tax notional rental income based upon a clause in the agreement referring to “usage charges” of Rs. 90 per square foot. The Assessing Officer consequently assessed hypothetical rent under the head “Income from House Property” and simultaneously disallowed substantial building-related expenditure including repairs, maintenance, service charges, and depreciation.

The litigation traversed multiple rounds before the Tribunal and Bombay High Court over nearly two decades. Ultimately, the Bombay High Court held that, at least qua the Tribunal, the characterization of such receipts as “Income from Other Sources” had attained finality and remanded the matter only for adjudication of pending issues relating to notional income and expenditure disallowance.

Following the High Court’s directions, the Tribunal held that once the receipts were taxable under the residual head “Income from Other Sources,” no notional rent could be assessed in the absence of actual receipt or enforceable accrual. The Tribunal further held that all expenditure incurred wholly and exclusively for earning such income remained deductible under Section 57(ii) and 57(iii). The ruling also deleted ad hoc disallowances relating to professional fees and trade incentive expenditure by reiterating settled jurisprudence that brand promotion and sales promotion expenditure ordinarily constitute revenue expenditure.