2010 (3) TMI 800 - AT - Income Tax

Reopening of the assessment was issued after the expiry of four years - Held that - The assessment can be reopened after four years only if it is established that there is a failure on the part of the assessee to disclose fully and truly all material facts. From the records, it is evident that there is no finding by the Assessing Officer that there is a failure on the part of the assessee to disclose fully and truly all material facts. Even otherwise, when all the material facts are available at the time of making the original assessment under section 143(3), then, the Assessing Officer is not permitted to reopen the assessment after the expiry of four years from the end of the relevant assessment year. Assessment on the basis of change of opinion - In the case of Kelvinator of India Ltd. (2010 - TMI 35201-SUPREME COURT OF INDIA ) the concept of change of opinion has not been obliterated and an assessment cannot be reopened on the basis of mere change of opinion.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 live link with the formation of the belief. Whether royalty payment be treated as revenue expenditure or capital expenditure - Held that - question has to be decided as per the terms of the agreement - In view of Alembic Chemical Works Co. Ltd. (1989 - TMI - 5277 - SUPREME Court) where assessee is given licence to manufacture specific products for a limited period.and there is no transfer of any technical know-how it will be treated as revenue expenditure.

Issues Involved:

1. Validity of reopening the assessment under section 147.
2. Treatment of royalty payment as capital expenditure or revenue expenditure.

Detailed Analysis:

1. Validity of Reopening the Assessment Under Section 147:

The assessee challenged the reopening of assessments for the years 2000-01, 2001-02, and 2002-03, arguing that all necessary materials were disclosed fully and truly during the original assessments. The Commissioner of Income-tax (Appeals) upheld the reopening, which the assessee contested on the grounds of being time-barred and based on a mere change of opinion.

The Tribunal noted that the original assessments were completed under section 143(3) after scrutiny, with all relevant details provided by the assessee. The reopening notices were issued beyond the four-year limit for the years 2000-01 and 2001-02. The Tribunal emphasized that reopening is permissible beyond four years only if there is a failure to disclose fully and truly all material facts. Since the Assessing Officer did not record any such failure, the reopening was deemed invalid.

For the year 2002-03, the Tribunal found no new material or information that could justify reopening based on a change of opinion. Citing the Supreme Court's decision in Kelvinator of India Ltd., the Tribunal held that reassessment must be based on tangible material and not merely a change of opinion. Consequently, the Tribunal set aside the reopening and reassessment for all three years as null and void.

2. Treatment of Royalty Payment as Capital Expenditure or Revenue Expenditure:

The dispute centered on whether the lump sum royalty payment of Rs. 2 crores per year should be treated as capital expenditure with depreciation allowed or as revenue expenditure. The Commissioner of Income-tax (Appeals) had treated 10% of the payment as capital expenditure and allowed depreciation, while the remaining 90% was considered revenue expenditure.

The Tribunal examined the collaboration agreement between the assessee and Matsushita Electric Industrial Company Ltd., which granted a non-exclusive and non-transferable licence to use technical know-how for manufacturing specific products. The Tribunal found that the agreement did not transfer any exclusive rights to the assessee, but merely allowed the use of technical know-how under a licence.

Citing various judicial precedents, including the Supreme Court's decision in I.A.E.C. (Pumps) Ltd. and the jurisdictional High Court's decisions, the Tribunal concluded that the payment for the right to use technical know-how should be treated as revenue expenditure. The Tribunal rejected the bifurcation of the royalty payment into capital and revenue components, holding that the entire payment was for the use of technical know-how under a licence for a limited period.

Conclusion:

The Tribunal allowed the assessee's appeals, setting aside the reopening of assessments and holding the entire royalty payment as revenue expenditure. The Revenue's appeals were dismissed.

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