2013 (8) TMI 523 - HC - Income Tax

Re-opening of assessment - Challenge to the notice u/s 148 - SAP Implementation charges claimed as Revenue expenditure in P&L A/c Held that - SAP Implementation charges in question was never treated as revenue expenditure, clubbing with Administrative expenses - Return and other accompanying documents were brought on record during the assessment proceedings - One such document happens to be the schedule of administrative expenses at Annexure-II, which includes the said sum of Rs.86.17 lac as a part of Capital Work in Progress In face of such documents on record, the first ground is held to be factually incorrect - When the expenditure itself was never claimed by way of revenue expenditure, the question of disallowing such an expenditure on such basis requiring of reopening of assessment would not arise Decided in favor of Assessee. Disallowance u/s 14A of the Income Tax Act of proportionate expenditure for earning the tax free income - Petitioner who had earned tax free dividend income should have been subjected to disallowance of proportionate expenditure for earning such income on the basis of the formula provided in Rule 8D of the Income-tax Rules, 1962 - This claim for disallowance u/s 14 A was examined at length and in the assessment order through a speaking order, part disallowance was made Held that - Question of disallowance of expenditure or part thereof under Section 14A of the Act for earning exempt income was very much alive before the Assessing Officer during the original assessment proceedings - Entire issue was scrutinised by the Assessing Officer during the original assessment proceedings. It is only upon consideration of the said aspect, assessing officer has made disallowance to the limited extent of Rs.2,11,316/-. Even within a period of four years such assessment cannot be reopened. Any permission to the Assessing Officer to do so would amount to permitting change of opinion - To correct the assessment order passed after a detailed examination by the Assessing Officer, the succeeding Assessing Officer cannot resort to the proceedings of reopening Notice quashed. - Decided in favor of Assessee.

Summary

Issues Involved:
1. Validity of the reopening of assessment under Section 148 of the Income-tax Act, 1961.
2. Treatment of SAP implementation charges as capital or revenue expenditure.
3. Disallowance of proportionate expenditure for earning tax-free income under Section 14A of the Income-tax Act, 1961.

Detailed Analysis:

1. Validity of the Reopening of Assessment under Section 148 of the Income-tax Act, 1961:
The petitioner challenged the notice dated March 22, 2012, issued by the respondent-Assistant Commissioner of Income-Tax under Section 148 of the Income-tax Act, 1961, for reopening the assessment for the assessment year 2007-08. The petitioner argued that the notice was issued without any valid grounds and within a period of four years from the end of the relevant assessment year.

2. Treatment of SAP Implementation Charges as Capital or Revenue Expenditure:
The respondent-Assistant Commissioner of Income-Tax issued the notice based on two grounds. The first ground was that the petitioner had claimed an expenditure of Rs. 86.17 lakhs related to SAP implementation charges as revenue expenditure, which the respondent considered to be capital in nature. The petitioner contended that it had never claimed such expenditure as revenue expenditure but had treated it as 'Capital Work in Progress'. The petitioner provided detailed objections and supporting documents, including audited financial statements, to substantiate its claim that the SAP implementation charges were capitalized and not treated as revenue expenditure. The Assessing Officer rejected these objections, stating that the petitioner had initially claimed the expense as administrative expense and only later capitalized it during the finalization of accounts. However, the court found that the petitioner's contention was valid and that the expenditure was indeed capitalized. Therefore, the first ground for reopening the assessment was factually incorrect and lacked validity.

3. Disallowance of Proportionate Expenditure for Earning Tax-Free Income under Section 14A of the Income-tax Act, 1961:
The second ground for reopening the assessment was the disallowance of proportionate expenditure for earning tax-free income. The Assessing Officer argued that the petitioner should have been subjected to disallowance based on the formula provided in Rule 8D of the Income-tax Rules, 1962. The petitioner opposed this, stating that during the original assessment, the claim was examined at length, and a part disallowance was made through a speaking order. The petitioner also argued that Rule 8D could not be applied retrospectively to the assessment year 2007-08. The court examined the sequence of events and communications between the petitioner and the Assessing Officer during the original assessment proceedings. It was evident that the issue of disallowance under Section 14A was thoroughly scrutinized, and a disallowance of Rs. 2,11,316/- was made. The court concluded that reopening the assessment on this ground would amount to a change of opinion, which is not permissible even within four years. Therefore, the second ground for reopening the assessment was also invalid.

Conclusion:
The court found that both grounds for reopening the assessment were invalid. The first ground lacked factual validity as the SAP implementation charges were capitalized and not treated as revenue expenditure. The second ground amounted to a change of opinion, which is not permissible. Consequently, the impugned notice dated March 22, 2012, was quashed, and the petition was disposed of accordingly.