2014 (5) TMI 887 - AT - Income Tax

Validity of order u/s 147 of the Act Mere change of opinion - Claim of deferred revenue expenses Held that - CIT(A) has clearly made a finding that the issue of deferred revenue expenses had cropped up in the regular assessment proceedings for the AY under consideration and the assessee company vide its letter dated 14.09.2005 had submitted a detailed explanation of the - CIT(A) held that the AO could not have held that the issue of deferred revenue expenditure was not examined by the AO in the scrutiny proceedings u/s 143(3) - from the records it could not be found that subsequently after AY 2001-02, any action other than the reassessment has been taken by the department to reopen the assessments of earlier years where deferred revenue expenses have been claimed in its entirety by the assessee company and which were allowed by the AO - there was no fresh material, let alone any tangible material in the possession of the AO so as to empower/ enable him to take recourse to the provisions of section 147 of the Act - the conclusion of the CIT(A) that the reopening of assessment was based merely on change of opinion is correct Decided against Revenue. Deletion of addition on capitalizing of expenses Development of new product Held that -Following Radhasoami Satsang Vs. CIT 1991 (11) TMI 2 - SUPREME Court - the treatment given to a particular item of the expenditure in books of account should not by itself be taken as conclusive evidence for treating the expenditure as capital or revenue expenditure - The law empowers the AO to assess the income of the assessee according to law and determine the tax payable - he cannot assess an assessee on an amount, which is not taxable in law, even if the same was shown by an assessee - There neither are any estoppels by conduct against law nor is there any waiver of the legal right as much as the legal liability to the assessed otherwise than according to the mandate of the law - CIT(A) has correctly concluded that the expenses would reveal that the expenses incurred by the assessee in both the Years is such, which will not create any capital asset in the hand of the assessee- the expenses cannot give any advantage of enduring nature in the capital field thus, there was no infirmity in the order of the CIT(A) Decided against Revenue.

Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act, 1961.
2. Deletion of addition made by capitalizing the expenditure incurred for developing new products.

Detailed Analysis:

1. Reopening of Assessment under Section 147 of the Income Tax Act, 1961:

The primary issue was whether the reopening of the assessment for the Assessment Year (AY) 2004-05 under Section 147 was justified. The Revenue contended that the assessee had wrongly claimed a deduction of Rs. 34,88,584/- for developing new products, which should have been capitalized as per the company's accounting policy. The Assessing Officer (AO) issued a notice under Section 148 on 31.01.2008, based on the belief that the income had escaped assessment.

The assessee argued that the reassessment was initiated without any new tangible material and was merely a change of opinion, which is not permissible under the law. The assessee had disclosed all relevant facts during the original assessment proceedings, and the AO had already examined the issue of deferred revenue expenditure.

The Tribunal observed that the AO's reasons for reopening the assessment were based on the same records available during the original assessment. There was no new material or information that emerged. The Tribunal relied on the Supreme Court's decision in CIT Vs. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC), which held that a mere change of opinion does not justify reopening an assessment. The Tribunal concluded that the reopening was based on a change of opinion and not on any new tangible material, thus making the reassessment invalid.

2. Deletion of Addition Made by Capitalizing the Expenditure Incurred for Developing New Products:

For AY 2004-05 and AY 2006-07, the AO had disallowed the expenditure incurred for developing new products, treating it as capital expenditure, and added Rs. 34,88,584/- and Rs. 43,85,584/- respectively to the assessee's income. The AO's rationale was that the expenses provided enduring benefits and should be capitalized, as indicated in the company's accounting policy.

The assessee contended that these expenses were of a revenue nature and had been consistently allowed as such in previous years. The Tribunal noted that the expenses included day-to-day operational costs like salaries, wages, and other routine expenses, which did not create any capital asset or provide enduring benefits in the capital field.

The Tribunal referred to the Supreme Court's judgment in State Bank of India Vs. CIT (1986) 157 ITR 67, which stated that the nature of the transaction should determine whether the expenditure is capital or revenue, not the entries in the books of account. The Tribunal also cited the Delhi High Court's decision in JCIT Vs. Modi Oliveti Ltd, which clarified that deferred revenue expenditure does not necessarily have to be capital expenditure.

The Tribunal upheld the CIT(A)'s decision to delete the addition, concluding that the expenses were correctly treated as revenue expenditure and allowed as deductions. The Tribunal emphasized that the treatment of expenses in the books of account should not be the sole determinant for their tax treatment.

Conclusion:

The Tribunal dismissed the Revenue's appeals, confirming the CIT(A)'s orders. The reopening of the assessment was deemed invalid as it was based on a change of opinion without new tangible material. The additions made by capitalizing the expenditure for developing new products were deleted, as the expenses were of a revenue nature and did not create any capital asset or provide enduring benefits in the capital field.

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