2017 (12) TMI 1594 - AT - Income Tax

Validity of reopening of assessment - software development income was not offered by the assessee on accrual basis and there was reason to believe that income had escaped assessment - information derived from the tax audit report - Held that - By reason of section 147 if the Income-tax Officer exercises his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion the same may be held to be unconstitutional. Section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate reassessment proceeding upon his mere change of opinion. If reason to believe of the Assessing Officer is founded on an information which might have been received by the Assessing Officer after the completion of assessment it may be a sound foundation for exercising the power under section 147 read with section 148 of the Act. We are unable to agree with the submission of Mr. Jolly to the effect that the impugned order of reassessment cannot be faulted as the same was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessee. It is one thing to say that the Assessing Officer had received information from an audit report which was not before the Income-tax Officer but it is another thing to say that such information can be derived by the material which had been supplied by the assessee himself. We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order detailed reasons have not been recorded an analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding with out anything further the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong. There was no fresh material available with the ld. Assessing Officer for harboring even a doubt that any income had escaped assessment. The reopening in our opinion was purely based on a change of opinion. It failed to satisfy the test laid down in Sec.147 of the Act. We hold the reopening to be bad in law. - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income Tax Act, 1961.
2. Treatment of advance received for software development.
3. Claim for depreciation on semi-finished software products.
4. Distinction between trading receipts and capital assets in the context of software development.

Detailed Analysis:

1. Validity of Reopening of Assessment:
The primary issue in this appeal is the validity of the reopening of assessment under Section 147 of the Income Tax Act, 1961. The assessee argued that the reopening was based on a change of opinion on the same set of facts without any fresh material. The original assessment was completed under Section 143(3) on 19.11.2010, where the assessee's claim for enhanced depreciation was denied based on the Supreme Court judgment in Goetze India Ltd vs. CIT, 284 ITR 323. The reopening notice under Section 148 was issued on 27.03.2013, citing the non-credit of an advance of ?1,05,93,698/- in the profit and loss account and the non-offer of software development income on an accrual basis.

2. Treatment of Advance Received for Software Development:
The assessee received an advance of ?1,05,93,698/- for software development, which was not credited to the profit and loss account but was instead credited to the Software Expenditure account. The Assessing Officer (AO) believed that this income had escaped assessment. The assessee contended that the advance was for a joint venture project, and due to differences between the parties, the project was stopped. The AO treated the advance as trading receipts under Section 28 of the Act, arguing that any receipts towards software should be considered as trading receipts.

3. Claim for Depreciation on Semi-Finished Software Products:
During the original assessment, the assessee claimed depreciation at 60% on the semi-finished software product, Health Q Software Products. The AO denied this claim, stating that without a revised return, such a claim could not be considered, relying on the Goetze India case. In the reassessment, the AO reiterated that semi-finished software should be treated as a current asset and not a capital asset, thus disallowing depreciation and amortization.

4. Distinction Between Trading Receipts and Capital Assets:
The AO argued that the semi-finished software was a current asset and not a capital asset, and therefore, no depreciation could be allowed. The assessee contended that investments made for software development should not be treated as part of its income and that there was a distinction between the sale of software products and investments made for software development.

Tribunal's Findings:
The Tribunal held that the reopening was based on a change of opinion, which is not permissible under Section 147. The original assessment had considered the details of the advance received and the depreciation claim. The Tribunal cited the judgments in CIT vs. M/s. Kelvinator India Ltd 320 ITR 561 and CIT vs. Kelvinator of India Ltd. 256 ITR 0001, emphasizing that a mere change of opinion does not justify reopening an assessment. The Tribunal concluded that there was no fresh material to suggest that any income had escaped assessment, and the reopening was invalid.

Conclusion:
The appeal was allowed, and the reopening of the assessment was set aside as invalid. The Tribunal did not consider the merits of the issues since the jurisdictional ground was decided in favor of the assessee.

Order Pronouncement:
The order was pronounced in the open court on 7th December 2017 at Chennai.