2012 (11) TMI 939 - AT - Income Tax

Validity of initiation of reassessment proceedings Held that - There is no allegation by the Assessing Officer that income has escaped assessment by reasons of failure of the assessee to disclose material facts fully and truly. Since, reassessment proceedings were being initiated after expiry of 4 years from the end of assessment year, this was condition precedent for valid initiation of reassessment proceedings - reopening of assessment beyond the period of four years could not be sustained Reopening on the ground of non deduction of TDS - Payments to foreign parties for licence to use of software - view taken by the Department that it is mandatory for the assessee to Deduct Tax at Source on such payments for licence to use software as they are in the nature Royalty - assesses has made payments to foreign parties for licence to use of software Held that - there could be no reassessment either on the basis of a subsequent decision of the Tribunal or on the Assessing Officer s own interpretation. In either case, it would be a mere change of opinion, so that the notice was not valid. Disallowance under section 40(a) of the Act Held that - Since the initiation of reassessment proceedings have been held to be invalid and the orders of reassessment have been annulled - it is not necessary to deal with the appeals of the revenue on merits - appeals dismissed

Summary

Issues Involved:
1. Validity of reopening assessments under Section 147 of the Income Tax Act, 1961.
2. Whether payments for software licenses constituted "royalty" requiring tax deduction at source under Section 195 and the consequent disallowance under Section 40(a) of the Act.

Detailed Analysis:

1. Validity of Reopening Assessments under Section 147:

The assessee contested the reopening of assessments for the years 1997-98 to 2000-01. The primary ground was that the reopening was invalid as there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, a condition precedent for reopening after four years as per the proviso to Section 147 of the Act.

For the assessment years 1997-98 and 1998-99, the Tribunal noted that the reasons recorded for reopening did not mention any failure by the assessee to disclose material facts. The Tribunal referenced the case of Grindwell Norton Ltd. vs. Jagdish Prasad Jangid, ACIT & others, where similar circumstances led to the court holding that reopening beyond four years was invalid. The Tribunal concluded that the initiation of reassessment for these years was invalid and annulled the reassessment orders.

For the assessment years 1999-2000 and 2000-01, the reassessment proceedings were initiated within four years. However, the Tribunal observed that the reasons for reopening were based on a change of opinion. The original assessments under Section 143(3) had considered the payments made by the assessee, and no disallowance was made under Section 40(a). The Tribunal cited the case of CIT vs. Kelvinator of India Ltd., where it was held that reassessment based on a mere change of opinion is not permissible. The Tribunal also referenced the case of Siemens Information System Ltd. vs. ACIT, where reopening based on differing interpretations by successive Assessing Officers was held invalid. Consequently, the Tribunal annulled the reassessment orders for these years as well.

2. Payments for Software Licenses as "Royalty":

The revenue argued that payments made by the assessee to foreign parties for software licenses constituted "royalty," requiring tax deduction at source under Section 195, and the failure to do so warranted disallowance under Section 40(a). The CIT(A) had held that these payments were not in the nature of royalty and thus did not require tax deduction at source, leading to the deletion of the disallowance.

Given the Tribunal's decision to annul the reassessment orders for all years in question, it did not find it necessary to address the merits of the revenue's appeals regarding the nature of the payments. Consequently, the revenue's appeals were dismissed.

Conclusion:

The Tribunal allowed the appeals by the assessee, holding that the reassessment proceedings for all the assessment years in question were invalid. The appeals by the revenue were dismissed as the reassessment orders were annulled, rendering the merits of the revenue's arguments moot.