2014 (2) TMI 238 - HC - Income Tax

Legality of reopening of assessment Bar of limitation u/s 147 of the Act - The assessee has explained and disclosed the entire facts which would constitute a full disclosure thus, the reopening of assessment is barred by the proviso to section 147 - the Tribunal has correctly appreciated the facts in holding that the reopening of the assessment orders are barred by limitation - the Commissioner of Income-tax (Appeals) as well as the Tribunal has concurrently held from the facts that the proviso to section 147 would not apply to the facts of this case. The reassessment was merely a relook of the earlier assessment with a change of opinion - the Assessing Officer reopens the assessment are actually vague and fanciful - the Commissioner of Income-tax (Appeals) came to a conclusion that the reasoning assigned by the Assessing Officer are not sufficient and thus, the reopening of the assessment was bereft of materials to come to a conclusion that there were reasons to believe that the income has escaped assessment there was no substantial question of law arises Decided against Revenue. Licence fee to be deducted as business allowance Held that - RPG Life Sciences as well as Philip Carbon Black are group companies of RPG Enterprises Ltd. and that both these companies are paying licence fees to RPG Enterprises Ltd - the expenditure incurred by the respondent assessee towards licence fee payment were relatable to the business expediency and profits of the respondent-assessee and that the benefits availed of by the respondent-assessee from the service of the group resource company was tangible and justified Decided against Revenue. Interest paid on borrowed capital u/s 36(1)(iii) of the Act Held that - The appellate authority and the Tribunal found that the investment made in shares by the assessee by utilising borrowed capital was for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments, thus, the claim was fully allowable under section 36(1)(iii) - the Revenue did not adduce any material to show that the borrowed capital was utilised by the assessee for non-business purposes - The appellate authority was correct in allowing the claim of the assessee and deleting the disallowance made by the assessing authority - the Tribunal in correct appreciation of the matter had in turn confirmed the finding of the appellate authority Decided against Revenue.

Summary

Issues Involved:
1. Legality of reopening of the assessment.
2. Allowability of licence fee as business expenditure.
3. Allowability of interest on borrowed funds as business expenditure.

Issue-wise Detailed Analysis:

1. Legality of Reopening of the Assessment:
The Tribunal held that the reopening of the assessment for the year 1996-97 was barred by limitation under the proviso to Section 147 of the Income-tax Act, as it was done after four years. The Tribunal found that the assessee had disclosed all material facts fully and truly during the original assessment, and no new material facts emerged to justify reopening. For the years 1997-98, 1998-99, and 1999-2000, the Tribunal found that the reopening was not in accordance with Section 147, as the reasons to believe that income had escaped assessment were not supported by the materials on record. The High Court upheld the Tribunal's findings, emphasizing that mere change of opinion does not justify reopening and that the Assessing Officer (AO) must have specific, reliable, and relevant information to believe that income has escaped assessment. The Court cited several Supreme Court and High Court decisions supporting this principle.

2. Allowability of Licence Fee as Business Expenditure:
The AO disallowed the licence fee paid to RPG Enterprises Ltd., considering it not wholly and exclusively for the purpose of business. However, the Commissioner of Income-tax (Appeals) and the Tribunal allowed the deduction, finding that the licence fee was paid for availing of valuable services and benefits from RPG Enterprises Ltd., which were necessary for the business operations of the assessee. The Tribunal and the Commissioner of Income-tax (Appeals) relied on similar cases where such payments were allowed as business expenditure. The High Court agreed with the Tribunal's findings, noting that the payment of licence fee was justified and related to business expediency and profits. The Court also referred to decisions of the Bombay and Calcutta High Courts, which had dismissed Revenue's appeals on similar issues, holding that no substantial question of law was involved.

3. Allowability of Interest on Borrowed Funds as Business Expenditure:
The AO disallowed the interest on borrowed funds used for investment in shares of CESC Ltd., considering it not for business purposes. The Commissioner of Income-tax (Appeals) and the Tribunal allowed the deduction, finding a proximate nexus between the business of the assessee and the investments made. The Tribunal noted that Section 36(1)(iii) of the Act does not require the investment to be wholly and exclusively for making or earning income and does not place any embargo on investments in group concerns. The High Court upheld the Tribunal's findings, agreeing that the investment was for strategic business purposes and the interest on borrowed capital was allowable as business expenditure. The Court cited relevant case law supporting this view and emphasized that the Revenue failed to show that the borrowed capital was used for non-business purposes.

Conclusion:
The High Court dismissed the appeals filed by the Revenue, upholding the Tribunal's findings on all issues. The reopening of the assessment was held to be illegal, the licence fee was allowed as business expenditure, and the interest on borrowed funds was also allowed as business expenditure.