2011 (4) TMI 509 - AT - Income Tax

Revision - Rectification of mistakes - The assessee is engaged in the business activity of manufacturing of power distribution transformers - during the course of assessment proceedings the assessee company was neither asked for any explanation regarding the entire one time technology transfer fee of Rs. 4,64,25,000/- nor any explanation in this regard was ever furnished by the assessee company - The position and function of the ITO is very different from that of a civil court - it is clear that the order can be termed to be erroneous if no inquiry is conducted by the Assessing Officer which was required to be called for - as per well established law, reduction of loss also is at par with enhancement in taxable income, hence, it cannot be said that no prejudice can be caused to the revenue if there are sufficient brought forward losses to set of current addition If the entire agreement is to be seen in the terms of obligations of the licensor vis-a-vis licensee, it can be observed that two types of revenue comes to the licensor; one is regarding one time technology transfer cost and the other is royalty earned during the subsistence of the agreement - the assessee has not been able to show that it has to incur or it has incurred any of the expenditures relating to the receipt of USD 1 million which has been received by the assessee in the shape of one time technology transfer cost - In the result, the appeal filed by the assessee is dismissed

Summary

Issues Involved:
1. Jurisdiction and validity of CIT's revision under Section 263.
2. Erroneous and prejudicial nature of the original assessment order.
3. Taxability of 'One time technology transfer fees'.
4. Application of matching principle for deduction of expenses.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of CIT's Revision under Section 263:
The appellant contested the CIT's jurisdiction to revise the assessment order under Section 263, arguing that the order was beyond jurisdiction, bad in law, and void ab initio. The appellant further argued that the issue of taxability of 'One time technology transfer fees' was debatable, thus ousting jurisdiction under Section 263. The Tribunal noted that the CIT had issued a show cause notice due to the assessee crediting only Rs. 92,85,000 out of Rs. 4,64,25,000 received as 'one time technology transfer fees' and showing the balance as 'other liabilities'. The Tribunal upheld the CIT's jurisdiction, emphasizing that the CIT has wide powers to revise an assessment if it is erroneous and prejudicial to the interest of revenue, especially when no inquiry was conducted by the Assessing Officer on the issue.

2. Erroneous and Prejudicial Nature of the Original Assessment Order:
The appellant argued that the original assessment order was neither erroneous nor prejudicial to the interest of revenue, as the balance amount of 'One time technology transfer fees' was offered for tax in subsequent years. The Tribunal found that the Assessing Officer neither asked for any explanation regarding the entire fee nor did the assessee furnish any. Citing precedents, the Tribunal held that failure to make necessary inquiries renders an assessment order erroneous and prejudicial to the interest of revenue. It was emphasized that the reduction of loss is equivalent to an increase in taxable income, thus causing prejudice to the revenue.

3. Taxability of 'One Time Technology Transfer Fees':
The appellant contended that the 'One time technology transfer fees' should be spread over five years, aligning with the duration of the related agreement. The Tribunal examined the agreement and concluded that the fee was a one-time payment for the license to be utilized by the licensee, with no obligation on the licensor to incur costs over the five-year period. The Tribunal rejected the appellant's reliance on various case laws, noting that the appellant failed to show any incurred or future liabilities related to the fee. The Tribunal upheld the CIT's view that the entire amount was taxable in the year of receipt, i.e., the previous year relevant to the assessment year under appeal.

4. Application of Matching Principle for Deduction of Expenses:
The appellant argued that if the entire 'One time technology transfer fees' were taxed in the year of receipt, the Assessing Officer should allow deductions for expenses incurred in subsequent years related to earning that income. The Tribunal found no merit in this argument, noting that the appellant did not demonstrate any specific expenses incurred or future liabilities related to the fee. The Tribunal upheld the CIT's direction to modify the assessment order without allowing such deductions.

Conclusion:
The Tribunal dismissed the appeal, affirming the CIT's order to revise the assessment under Section 263, holding that the original assessment was erroneous and prejudicial to the interest of revenue. The entire 'One time technology transfer fees' was deemed taxable in the year of receipt, and no deductions for future expenses were warranted. The Tribunal's decision was based on a thorough examination of the agreement and relevant legal precedents, emphasizing the necessity of proper inquiry by the Assessing Officer.