2015 (5) TMI 216 - HC - Income Tax

Reopening of assessment - notice of reopening includes the ground that only on objection raised by the audit department, such exercise is undertaken - Income reflected as on Advance Income (Prepaid) was in fact for the outright purchase of Recharge by Prepaid Connection Customers and the same was not an advance to be appropriated against the future use of services and Non-amortization of royalty paid to the Wireless Planning Commission of Government of India by treating the same as capital expenditure instead, entire expenditure charged to P&L Account was allowed as deduction resulting into under assessment of income - Held that - Section 147 of the Act permits initiation of reassessment proceedings only when the Assessing Officer has a reason to believe that income has escaped the assessment. Whenever the audit party raises objections, it may provide information, however, eventually it is the Assessing Officer who should be satisfied himself & form a belief of his own that taxable income escaped the assessment. He cannot abdicate his decision making power by choosing to solely rely on the audit objection or follow such direction without his subjective satisfaction. In the instant case, therefore, the petitioner has succeeded on this ground alone and notice of reopening does need to be quashed. The amount paid for prepaid service was contended to be the outright purchase of Recharge by Prepaid Connection Customers and not an advance to be appropriated against the future use of services. The petitioner followed mercantile system of accounting and yet recognized the revenue only when the services were rendered to the prepaid customers.It was the stand of the petitioner that as long as no services were rendered by the assessee to the customers, income cannot be recognized by the assessee. It is only at the time of actual use made of the network of the assessee by the customers that he would be required to render the services. Such issue was threadbare examined by the Assessing Officer and therefore also, it cannot be said that the assessee failed to disclose fully and truly all material facts. As far as the second question was concerned, Section 35ABB provides for amortization of license fees paid for operating telecommunication services. Petitioner's claim for the Assessment Year 2008-2009 was disallowed to the extent of ₹ 98,29,17,915/- charged to P & L account but one eleventh (1/11 th) of which was allowed as deduction for considering the same for amortization. It is the stand of the petitioner that the royalty paid to the Wireless Planning Commission of Government of India is not paid for obtaining the license & this being revenue expenditure & not capital expenditure for obtaining license, is not amortizable under Section 35ABB. The respondent-Assessing Officer thus, already had raised the said issue of amortization of royalty paid to the Wireless Planning Commission of Government of India while framing the assessment under Section 143(3) of the Act. See CIT v. Kelvinator India Ltd. reported in (2010 (1) TMI 11 - SUPREME COURT OF INDIA). Thus the impugned notice of reopening fails with all consequential reliefs - Decided in favour of assessee.

Issues Involved:
1. Validity of the notice of reopening under Section 148 of the Income Tax Act, 1961.
2. Whether the reopening was based on a change of opinion.
3. Adequacy of disclosure of material facts by the petitioner.
4. Impact of audit objections on the reopening of assessment.

Issue-wise Detailed Analysis:

1. Validity of the notice of reopening under Section 148 of the Income Tax Act, 1961:
The petitioner challenged the notice of reopening issued under Section 148 of the Income Tax Act, 1961, for the Assessment Year 2007-2008. The reopening was proposed on two grounds: (1) Income reflected as "Advance Income (Prepaid)" was for the outright purchase of "Recharge" by Prepaid Connection Customers, and (2) Non-amortization of royalty paid to the Wireless Planning Commission by treating the same as capital expenditure.

2. Whether the reopening was based on a change of opinion:
The petitioner argued that the grounds for reopening had already been scrutinized by the Assessing Officer during the original assessment under Section 143(3) of the Act. The petitioner contended that the notice was nothing but a change of opinion, which is not permissible. The court noted that the Assessing Officer had previously examined these issues in detail, and the reopening was based on audit objections, not on any new material or independent belief.

3. Adequacy of disclosure of material facts by the petitioner:
The petitioner asserted that there was no failure to disclose fully and truly all material facts necessary for the assessment. The court observed that the petitioner had provided all relevant details during the original assessment, and the issues raised in the reopening notice had been thoroughly scrutinized. Therefore, the petitioner had not failed in its duty to disclose material facts.

4. Impact of audit objections on the reopening of assessment:
The court examined whether the reopening was based solely on audit objections or if the Assessing Officer had formed an independent belief. The court found that the Assessing Officer had initially disagreed with the audit objections and only proceeded with the reopening due to pressure from the audit party. The court emphasized that the Assessing Officer must have an independent reason to believe that income had escaped assessment, and cannot rely solely on audit objections.

Conclusion:
The court concluded that the reopening of the assessment was based on a change of opinion and solely on audit objections, without any independent application of mind by the Assessing Officer. The court held that the notice of reopening dated 07.03.2012, and all consequential actions, were invalid. The petition was disposed of, granting relief to the petitioner.

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