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2017 (7) TMI 967 - HC - Income TaxReopening of assessment - reasons to believe - perusal of the accounts did not reveal that the Assessee added back the capital expenditure on acquisition of software and the value of the fixed assets - Held that - Revenue has sought to urge during the course of the submissions before this Court is not even urged in the counter-affidavit. All that is stated is that despite what the Assessee has averred being prima facie in the order, the Revenue still needs to verify that fact. The audited accounts were already available with the AO and formed part of the assessment record. They did not require re-assessment proceedings for the purpose of such verification. In any event, the Court declines to accept these reasons as being valid reasons for re-opening of the assessment. Finance lease - Held that - The lessee was allowed only to claim the deduction for lease rent in respect of leased assets and not claim depreciation. Consequently, for the purposes of accounting treatment as mandated by AS-19, the Assessee capitalized the value of the motor vehicles taken on lease and showed the finance lease account payable as secured loan in its books of accounts. While the interest on the said amount was directly debited to the Profit and Loss Account and claimed as deduction in the computation of taxable income, the principal portion of the finance lease rent paid by the Assessee reduced the finance lease liability that was not debited to the Profit and Loss Account. As part of the accounting treatment, the depreciation was debited to the Profit and Loss account. For the purposes of tax treatment, however, the depreciation was in fact added back. The Assessee separately claimed the principal portion of the leased rent. The Assessee was guided by Circular No. 2 of 2001 issued by the Central Board of Direct Taxes ( CBDT ) which provided that AS-19 would have no implication on the allowance of depreciation on the assets under the provisions of the Act. All of this was already explained in the original assessment proceedings and examined by the AO. A complete disclosure is made in the balance sheet. Note 5 to the accounts also explained this. In the later AY i.e., AY 2005-06, the AO again examined this issue and accepted the explanation offered by the Assessee. Not a valid reason for re-opening of the accounts. Eligibility conditions under Section 80-IA and 80-IB - Held that - As pointed out by the Assessee for the subsequent AY 1995-96, the Revenue has accepted that the Assessee fulfils the eligibility conditions under Section 80-IA and 80-IB of the Act as processing of blank CDs, dedicating them to a specific use, constitutes manufacture in terms of Section 80-IA(12)(b) read with Section 33B of the Income Tax Act The fact that there was a separate auditor in respect of the Form 10-CCB for the purposes of claiming deduction under Sections 80-IA and 80-IB has been acknowledged by the Revenue itself. How all of this can go to deprive the Assessee of the deduction is not clear. In any event, the jurisdictional requirement that there must be some tangible material warranting prima facie to the belief that income has escaped assessment does not stand satisfied. The reasons have no communication as to what was the material fact which was not disclosed by the Assessee during the original assessment proceedings. The audited accounts give an explanation for the cost of the master copy. Again, the order of the AO reveals that the issue was discussed at length. This cost was disallowed as capital expenditure to the extent of ₹ 9,95,460. As regards the comments of the Auditor, the entire relevant passage reveals that the comments are in the context of paras 2 (a) - (h) which cannot be acted upon by the Assessee. In fact, in view of each of the items of classification in the Auditor s report, there is addition to the Assessee s income in the revised return. The Court is, therefore, satisfied that none of the reasons for re-opening the assessment satisfy the legal requirement as stipulated in the proviso to Section 147 of the Act. - Decided in favour of assessee.
Issues Involved:
1. Validity of notice under Section 147/148 of the Income Tax Act for re-opening the assessment. 2. Failure to add back capital expenditure on software acquisition. 3. Incorrect claim of finance lease rentals. 4. Deduction under Section 80-IB of the Income Tax Act. 5. Failure to deduct and deposit withholding taxes. Detailed Analysis: 1. Validity of Notice under Section 147/148: The Assessee challenged the notice dated 31st March 2010, issued by the Deputy Commissioner of Income Tax, for re-opening the assessment for AY 2003-04. The Court noted that the re-opening was after four years from the end of the relevant AY, thus attracting the first proviso to Section 147 of the Act. The Revenue must show that income escaped assessment due to the Assessee's failure to fully and truly disclose all material facts necessary for the assessment. The Court emphasized that the reasons for re-opening must clearly indicate the failure of the Assessee to disclose material facts and should not be based on a mere change of opinion. 2. Failure to Add Back Capital Expenditure on Software Acquisition: The Assessee argued that the amounts for capital expenditure on software acquisition and fixed assets written off had been added back in the revised return. The Revenue admitted this fact but sought to verify it. The Court held that re-opening for verification purposes was not justified, as the audited accounts were already available with the AO during the original assessment. 3. Incorrect Claim of Finance Lease Rentals: The Assessee explained the accounting treatment of finance lease rentals under AS-19, distinguishing between accounting and tax treatment. The Court found that the Assessee had fully disclosed the treatment in the original assessment proceedings. The AO's reason for re-opening on this ground did not meet the jurisdictional requirement of the first proviso to Section 147. 4. Deduction under Section 80-IB: The AO questioned the Assessee's claim under Section 80-IB, suggesting that the Assessee's activity did not amount to manufacturing and raised issues about the location and registration of the industrial undertaking. The Court noted that these issues were already discussed in the original assessment and subsequent appellate proceedings. The Court found no fresh tangible material to justify the re-opening of the assessment on this ground. 5. Failure to Deduct and Deposit Withholding Taxes: The AO claimed that the Assessee failed to deduct TDS on the cost of the master copy, treating it as royalty. The Court observed that this issue was examined in the original assessment, where the expenditure was disallowed as capital expenditure. The Court found no failure on the Assessee's part to disclose material facts. Conclusion: The Court quashed the notice dated 31st March 2010 issued under Section 147/148 for re-opening the assessment for AY 2003-04. The reasons provided by the AO did not satisfy the legal requirements for re-opening the assessment, as there was no failure by the Assessee to fully and truly disclose all material facts necessary for the assessment.
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