2010 (5) TMI 645 - AT - Income Tax

Validity of reassessment proceedings initiated by issue of notice u/s 148 - assessment reopened on ground that expenses incurred for development of initial computer software technology known as Vision Software is a capital in nature, the same cannot be allowed as revenue expenditure as claimed by assessee - assessee challenged reopening of the assessment on the ground that no new facts had been brought on record and therefore, assessment could not be reopened merely on the basis of change of opinion - Held that - When AO had enquired into a point or an issue while completing the assessment proceedings u/s 143(3), he is presumed to have applied his mind to the same and formed an opinion about its allowability even though no specific reference to the point or the enquiry made by him is made in the assessment order and even if no reasons were given in the assessment order as to how he formed the opinion about the allowability of the assessee s claim. In the absence of any tangible material which could persuade the AO to form the belief that income chargeable to tax had escaped assessment by reason of the allowance of the expenses, he cannot issue notice u/s 148, even though the notice has been issued on 7-10-2002, which is within the period of four years from the end of the AY 1998-99. Therefore, initiation of reassessment proceedings u/s 147 was void ab initio - Decided in favor of assessee.

Issues Involved:

1. Validity of reassessment proceedings initiated under section 148 of the Income-tax Act, 1961.
2. Whether the reassessment proceedings were based on a mere change of opinion.
3. The allowance of expenditure on Vision Software as revenue expenditure.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings:

The main issue in this appeal is the validity of reassessment proceedings initiated by issuing a notice under section 148 of the Income-tax Act, 1961. The assessee filed its return of income declaring a total loss, which was assessed under section 143(3). The audit party later noticed that the assessee had capitalized the cost of Vision Software and claimed depreciation, while also claiming the same amount as revenue expenditure in the computation of income. The Assessing Officer (AO) reopened the assessment based on the audit party's note, believing that the expenditure was capital in nature and should be disallowed, leading to under-assessment of income.

2. Reopening Based on Change of Opinion:

The assessee challenged the reopening on the grounds that no new facts were brought on record, and the assessment could not be reopened merely on the basis of a change of opinion. The AO rejected this contention, stating that the assessee had taken double benefit by claiming depreciation and revenue expenditure. However, upon appeal, the CIT(A) found that the assessee had not claimed double benefit and that the reassessment proceedings were merely a case of change of opinion. The Tribunal upheld this view, noting that the AO had already made necessary inquiries during the original assessment, and no new facts had emerged to justify reopening the assessment.

3. Allowance of Expenditure on Vision Software:

The AO's decision to disallow the expenditure on Vision Software as revenue expenditure was also challenged. The CIT(A) held that the expenditure was correctly claimed as revenue expenditure, and the reassessment was based on a change of opinion. The Tribunal agreed, noting that the AO had applied his mind during the original assessment and allowed the expenditure as revenue expenditure. The Tribunal emphasized that reassessment proceedings could not be initiated merely on the basis of a change of opinion, as established by the Supreme Court in CIT v. Foramer France and the Full Bench of the Delhi High Court in CIT v. Kelvinator of India Ltd.

Separate Judgments by Judges:

One judge disagreed with the majority view, arguing that the AO had overlooked relevant aspects during the original assessment, and the reopening was justified. However, the majority held that the reassessment proceedings were void ab initio, as they were based on a mere change of opinion without any new tangible material.

Conclusion:

The Tribunal upheld the CIT(A)'s order, quashing the reassessment proceedings as void ab initio. The appeal by the Revenue was dismissed, and the reassessment proceedings were held invalid due to being based on a change of opinion without any new facts or tangible material.

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