2015 (2) TMI 208 - HC - Income Tax

Reopening of assessment - depreciation claimed on Goodwill and Non-compete fees at 25% cannot be allowed as they are not listed amongst the intangible assets set out in Appendix to the Income Tax Rules, 1961 - Held that - In this case, the assessment sought to be re-opened is less than four years from the end of the relevant Assessment Year. In such a case also, the primary conditions for invoking jurisdiction under Section 147/148 of the Act has to be satisfied, i.e. one there must be reason to believe and two - income chargeable to tax must have escaped assessment. In the present case in the return of income filed for the Assessment Year 2002-03, the Petitioner had in the computation of income, disclosed the claim for depreciation made on intangible assets including the Non-compete fees. During the course of assessment proceedings, various queries were raised by the Assessing Officer including seeking a detailed working of the depreciation claimed. By letter dated 11th January, 2004, the Petitioner had supplied the necessary details and the Assessing Officer by an order dated 28th January, 2005 passed under Section 143(3) of the Act in regular assessment proceedings allowed the claim for depreciation on Non-compete fees. In fact, the order dated 28th January, 2005 passed in regular assessment proceedings specifically discusses the Petitioner's claim for depreciation and disallows the excess depreciation claimed on buildings at 10% to the extent it is in excess of the prescribed 5%. This would be further evidence of the Assessing Officer having applied his mind to the depreciation claimed by the Petitioner in respect of its block of assets. Hence, it is clear that the reason recorded in support of the impugned notice seeking to deny depreciation on Non-compete fees has been issued on account of change of opinion. Thus, it lacks reasonable belief. Consequently, the impugned notice is not sustainable. There has been a change of opinion, is evident from the fact that for earlier assessment years as well as for subsequent assessment years, the depreciation has been allowed in respect of Non-compete fees as a part of block of assets, claiming depreciation at 25%. Where facts and law are identical over different years, then the principle of consistency sets in and the Revenue is not permitted to change its stand from year to year when there is no change in the facts and the law. In these circumstances, we find that the Assessing Officer had no reason to believe that income chargeable to tax has escaped assessment on account of depreciation being claimed on Non-compete fees. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of notice under Section 148 of the Income Tax Act, 1961 for re-opening assessment.
2. Allowability of interest paid on borrowed capital as revenue expenditure.
3. Depreciation on intangible assets, specifically Goodwill and Non-compete fees.

Issue-wise Detailed Analysis:

1. Validity of Notice under Section 148 of the Income Tax Act, 1961 for Re-opening Assessment:

The petition challenges the notice dated 30th March 2007 issued under Section 148 of the Income Tax Act, 1961, seeking to re-open the assessment for the Assessment Year 2002-03. The notice was initially stayed pending the disposal of the petition. The primary conditions for invoking jurisdiction under Section 147/148 of the Act are twofold: there must be a reason to believe that income chargeable to tax has escaped assessment. Even if the reopening is within four years from the end of the relevant assessment year, these twin conditions must be satisfied. The Court found that the impugned notice was issued due to a change of opinion, thus lacking reasonable belief and making the notice unsustainable.

2. Allowability of Interest Paid on Borrowed Capital as Revenue Expenditure:

The petitioner claimed a deduction on interest paid as revenue expenditure under Section 36(1)(iii) of the Act. The Assessing Officer initially accepted this claim during the regular assessment proceedings. However, the reopening notice challenged this deduction, asserting that the interest paid on borrowed capital should be capitalized and not allowed as revenue expenditure. Both parties agreed that under Section 36(1)(iii) of the Act, interest paid on amounts borrowed for capital expenses is allowable, as supported by the Supreme Court's decision in Deputy Commissioner of Income Tax v/s. Core Health Care Ltd. Thus, this ground for reopening was deemed unsustainable.

3. Depreciation on Intangible Assets, Specifically Goodwill and Non-compete Fees:

The petitioner claimed depreciation on Goodwill and Non-compete fees at 25%, treating them as intangible assets. The Assessing Officer initially accepted this claim but later challenged it in the reopening notice, stating that these items are not listed among the intangible assets as per the Income Tax Rules, 1961. Both parties agreed that the depreciation on Goodwill is covered by the Supreme Court's decision in Commissioner of Income Tax v/s. Smifs Securities Ltd., favoring the petitioner. However, the controversy remained regarding the depreciation on Non-compete fees. The petitioner argued that the reopening notice was issued due to a change of opinion, as the Assessing Officer had already considered and allowed the depreciation on Non-compete fees during the regular assessment proceedings. The Court found that the Assessing Officer's reason for denying depreciation on Non-compete fees was indeed due to a change of opinion, making the notice unsustainable. The Court also noted that the depreciation on Non-compete fees had been allowed in earlier and subsequent assessment years, and the Revenue had not contested this in appeals, reinforcing the principle of consistency.

Conclusion:

The Court quashed and set aside the impugned notice dated 30th March 2007, allowing the petition with no order as to costs. The reopening of the assessment was deemed invalid due to the lack of reasonable belief and the change of opinion by the Assessing Officer.