2015 (10) TMI 159 - AT - Income Tax

Revision u/s 263 - allowance of royalty expenditure - CIT(A) annulling the order u/s. 143(3)/147 while holding invalid the reopening u/s. 147 - Held that - It is an admitted fact that decision of the Hon ble Supreme Court in the case of Sourthern Switchgear Ltd. v. CIT 1997 (12) TMI 105 - SUPREME Court was very much available at the time of assessment. The decision of the Hon ble Supreme Court of India is a Law of Land in which it is clearly held that royalty expenditure is not allowable expenditure. But the AO has escaped overlook the aforesaid judgments and has not considered the same while completing the original assessment. But later on as and when it came to the notice of the AO, he adopted the prescribed procedure under the law for reopening of case of the assessee and has rightly reopened the case of the assesee and completed the assessment under section 147 w.e.f. 143(3) of the Act vide order dated 30.11.2009. But the Ld. First Appellate Authority has not appreciated this version of the AO while cancelling the assessment made by the AO on 30.11.2009. In our considered opinion, Ld. First Appellate Authority has cancelled the order dated 30.11.2009 passed by the AO and held that the case of the assessee has been reopened by the AO on the basis of change of opinion, in view of the decision of the CIT vs. Kelvinator India Ltd. (2010 (1) TMI 11 - SUPREME COURT OF INDIA). In our view the finding of the Ld. First Appellate Authority is contrary to the facts of the case, because the decision of the Hon ble Supreme Court in Sourthern Switchgear Ltd. v. CIT was very much available, but the same has been escaped/ overlooked by the AO while completing the original assessment. Therefore, later on the AO has rightly reopened the assessment u/s. 147. In our considered opinion, the impugned order is not sustainable in the eyes of law and hence, we cancel the impugned order dated 02.7.2010 passed by the Ld. CIT(A) as the Ld. CIT(A) has not decided the case of the assessee on merits. She has only declared the assessment anulled and which we have cancelled as mentioned in the forging paragraph. Ld. CIT(A) is also directed to decide the case of the assessee on merits, after giving adequate opportunity of being heard the parties. - Decided in favour of revenue for statistical purposes

Summary

Issues:

1. Validity of reopening of assessment u/s. 147 based on change of opinion.
2. Consideration of judicial decisions and availability of information at the time of original assessment.
3. Assessment of royalty expenditure as capital or revenue.
4. Judicial interpretation of the term "reason to believe" under section 147.

Issue 1: Validity of reopening of assessment u/s. 147 based on change of opinion:

The appeal by the Revenue contested the Ld. CIT(A)'s decision annulling the order u/s. 143(3)/147 of the I.T. Act, arguing that the reopening u/s. 147 was valid. The Ld. CIT(A) held that the case was reopened on the basis of the same records available during the original assessment, indicating a change of opinion rather than new information leading to income escapement. Citing judicial decisions, the Ld. CIT(A) deemed the reopening unjustified. The Appellate Tribunal disagreed, emphasizing that the decision of the Hon'ble Supreme Court regarding royalty expenditure was available during the original assessment, and the AO rightly reopened the case under section 147. The Tribunal concluded that the Ld. CIT(A)'s decision was contrary to the facts, canceled the order, and directed a merit-based assessment.

Issue 2: Consideration of judicial decisions and availability of information at the time of original assessment:

The Ld. CIT(A) highlighted that the Assessing Officer (AO) failed to consider the judicial decisions, specifically the case of Southern Switchgears Limited v. CIT, available during the original assessment. The Ld. CIT(A) reasoned that the AO's reliance on the same records without new information constituted a change of opinion, rendering the reopening invalid. However, the Appellate Tribunal disagreed, emphasizing the importance of the Hon'ble Supreme Court's decision on royalty expenditure, which the AO overlooked during the original assessment, justifying the subsequent reopening of the case.

Issue 3: Assessment of royalty expenditure as capital or revenue:

The case involved a dispute over the treatment of royalty expenditure as capital or revenue. The AO initially allowed the expenditure but later reopened the assessment based on the decision of the Hon'ble Supreme Court regarding the non-allowability of royalty expenditure. The Ld. CIT(A) annulled the assessment, citing the reopening as a change of opinion. In contrast, the Appellate Tribunal held that the AO's reassessment was justified due to the overlooked judicial decision, leading to the cancellation of the Ld. CIT(A)'s order and directing a merit-based assessment.

Issue 4: Judicial interpretation of the term "reason to believe" under section 147:

The Appellate Tribunal's decision focused on interpreting the term "reason to believe" under section 147 of the I.T. Act. The Tribunal emphasized that the AO's reopening of the assessment was based on the Hon'ble Supreme Court's established law regarding royalty expenditure, which was available during the original assessment but overlooked. The Tribunal held that the AO's actions were in line with the legal provisions, rejecting the Ld. CIT(A)'s conclusion of a change of opinion and directing a thorough assessment on merits.

This detailed analysis of the judgment provides insights into the legal intricacies surrounding the validity of reopening assessments, the consideration of judicial decisions, and the treatment of specific expenditures, offering a comprehensive understanding of the case.