2014 (11) TMI 518 - AT - Income Tax

Reassessment u/s 147 - Performance Linked Incentive disallowed Held that - The AO completed the assessment u/s 143(3) of the Act at an income of ₹ 435,03,14,230/- and on appeal filed by the assessee the FAA has also given some relief to the assessee and appeal effect u/s 143(3)/250/154 was also given by the AO on 09/04/2008 - AO during the course of original assessment proceeding raised specific query regarding change in accounting policy and the assessee filed its reply dated 12/01/2006 with support of documentary evidence - The AO has considered the same and accepted the explanation given by the assessee - the AO has dealt upon the issue of Performance Linked Incentive (PLI) during the course of original assessment - The assessee company has duly disclosed the change in accounting policy regarding Productivity Linked Incentive before the AO at the time of original assessment. Depreciation on plant & machinery on Account of exchange variation disallowed software development expenses disallowed - Held that -There is no occasion to add back ₹ 24,08,326/- as depreciation on account of exchange variation of ₹ 84,32,302/- capitalized in the cost of fixed assets that the issue of disallowances of software development in M/s Amway India Enterprises vs. DCIT 2008 (11) TMI 432 - ITAT DELHI it has been held that software development expenses are revenue in nature - The details of software expenses has already been furnished by the assessee during the course of original assessment which is not denied by the Revenue Authority in their orders. Notice for reopening of assessment u/s 148 Held that - The year in question is A.Y. 2004-05 which means any notice u/s 148 issued after 31/03/2009 is not sustainable in the eye of law - It can only be sustainable if it passes the test of proviso, namely that the escapement of income should be on account of failure on the assessee s part to disclose fully and truly all material facts relevant to its income - When the AO is able to demonstrate that escapement of income therein is occasioned by incompetence or inaccuracy in the assessee disclosure - the reassessment order is not sustainable in the eye of law and the AO assumed his jurisdiction u/s 147 of the Act as it was a case of change of opinion and the AO has not brought on record any fresh material or information for assuming jurisdiction u/s 147 of the Act the order of the FAA is upheld Decided against revenue.

Summary

Issues Involved:
1. Validity of reassessment proceedings under section 147 of the Income Tax Act.
2. Disallowance of Performance Linked Incentive (PLI).
3. Disallowance of depreciation on plant & machinery due to exchange variation.
4. Disallowance of software development expenses.

Issue 1: Validity of reassessment proceedings under section 147 of the Income Tax Act:
The Revenue appealed against the order passed by the Commissioner of Income Tax (Appeals) challenging the reassessment order dated 17/10/2012 for A.Y. 2004-05. The assessee contended that the reassessment was beyond the jurisdiction as the notice under section 148 was issued after the four-year limitation period. The First Appellate Authority quashed the reassessment order, stating that it was time-barred and lacked jurisdiction. The assessee argued that all necessary details were disclosed during the original assessment, and the AO had no fresh material to justify reassessment. Legal precedents were cited, emphasizing that reassessment based on a mere change of opinion is impermissible. The First Appellate Authority's decision was upheld, emphasizing that the AO lacked new material to support reassessment under section 147.

Issue 2: Disallowance of Performance Linked Incentive (PLI):
The AO disallowed PLI amounting to &8377; 1,87,00,000 in the reassessment. However, it was noted that the AO had raised specific queries during the original assessment regarding a change in accounting policy, which the assessee duly explained with supporting evidence. Additionally, the CIT had accepted the PLI claim in a previous proceeding. The Tribunal found that the issue had been adequately addressed during the original assessment, and the reassessment disallowance was unjustified.

Issue 3: Disallowance of depreciation on plant & machinery due to exchange variation:
The AO disallowed depreciation of &8377; 21,08,326 on plant & machinery due to exchange variation. The Tribunal observed that the depreciation chart was submitted by the assessee during both original and reassessment proceedings. As the cost of fixed assets was reduced in the depreciation chart, there was no basis for disallowing the depreciation. The Tribunal found that the issue had been sufficiently dealt with during the original assessment, rendering the reassessment disallowance unwarranted.

Issue 4: Disallowance of software development expenses:
The AO disallowed software development expenses amounting to &8377; 18,43,759 in the reassessment. However, the Tribunal noted that a Special Bench of ITAT Delhi had ruled in favor of treating software development expenses as revenue in nature. The Tribunal further referenced a High Court decision supporting the treatment of such expenses as revenue. The Tribunal found that the assessee had provided details of software expenses during the original assessment, which were not contested by the Revenue. Consequently, the reassessment disallowance of software development expenses was deemed unjustified.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the First Appellate Authority's decision based on thorough legal and factual analysis of each issue involved in the case.