2023 (4) TMI 1307 - HC - Income Tax

Reopening of assessment u/s 147 - nature of expenses - upgradation and development of various softwares - notice issued after a period of 4 years - assessee did not provide any explanation as to why the said expenses should be considered as revenue and not capital expenditure and the assessing officer had recorded reasons - HELD THAT - After more than 4 years, the only reason for initiating reassessment proceedings is that only 30% to 60% depreciation could be given and rest of the amount is to be taken as capital. This change of opinion cannot be made a ground for reassessment. Once, the AO had accepted the return and treated above said expenditures as revenue as these were incurred only to facilitate the business of the assessee who is engaged in the business of advertising and marketing communications. Further, the expenditures were disclosed at the time of making original assessment which were rightly treated as revenue. Thus after a period of 4 years, only on account of change of opinion, re-assessment proceedings cannot be initiated. In Kitchen Express Overseas Ltd.'s case 2017 (12) TMI 1127 - GUJARAT HIGH COURT it has also been held that any expenditure incurred on purchase of software, software developments and services to facilitate existing infrastructure is to be taken as revenue and not capital. Thus writ petition is allowed and initiation of re-assessment proceedings are set aside on both the counts i.e. delay and merits. Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961 for reassessment.
2. Compliance with the conditions under Section 143(3) for reopening the assessment.
3. Whether the reassessment proceedings initiated after 4 years constitute a change of opinion.
4. Classification of expenses as revenue or capital in nature.

Summary of Judgment:

1. Validity of Notice under Section 148:
The petitioner sought quashing of the notice dated 30.03.2019 issued under Section 148 of the Income Tax Act, 1961 and the order dated 10.07.2019 disposing of objections related to the assessment year 2012-13. The petitioner argued that the notice for reassessment was issued beyond the permissible period of 4 years, as the original assessment was completed on 05.03.2015.

2. Compliance with Conditions under Section 143(3):
The petitioner contended that for reassessment under Section 143(3), two conditions must be met: the Assessing Officer must have reasons to believe that income chargeable to tax has escaped assessment, and such escapement must be due to the assessee's failure to disclose fully and truly all material facts. The petitioner argued that these conditions were not satisfied in their case.

3. Change of Opinion:
The petitioner argued that the reassessment proceedings were initiated based on a change of opinion, which is not permissible after a period of 4 years. The petitioner cited various judgments, including *State Bank of Patiala vs. Commissioner of Income-tax* and *Principal Commissioner of Income-tax-2 vs. L & T Ltd.*, to support their claim that reassessment based on a change of opinion should be set aside.

4. Classification of Expenses:
The reassessment was initiated on the grounds that certain expenses on computer supplies and software should have been capitalized rather than treated as revenue expenses. The petitioner contended that these expenses were disclosed during the original assessment and were rightly treated as revenue expenses. The court referred to judgments such as *Commissioner of Income-tax, Delhi-IV vs. Indian Visit.com (P.) Ltd.* and *Principal Commissioner of Income Tax-2 vs. Kitchen Express Overseas Ltd.*, which held that expenditures on software development and services facilitating existing infrastructure should be treated as revenue expenses.

Conclusion:
The court concluded that the notice for reassessment was issued beyond the permissible period of 4 years, and the reassessment proceedings were based on a change of opinion. Therefore, the writ petition was allowed, and the initiation of reassessment proceedings was set aside on both counts of delay and merits.