2016 (7) TMI 907 - AT - Income Tax

Reopening of assessment - Held that - Explanation-1 to Sec.147 of the Act gives power to the AO to re-open the assessment In our opinion, for reopening of assessment , it is not necessary that information must be derived from external source of any kind or that there must be a disclosure of new and important matters subsequent to re-opening of assessment. The re-assessment is permissible even if the information is obtained from proper investigation from the materials and records or from any enquiry or research into the facts or law. The tax payer cannot be allowed to take advantage of any lapse on the part of the AO. In the instant case, admittedly assessment is reopened within four years and the assessment was reopened for considering the disallowance expenditure of tools. As such, we cannot say that there is a change of opinion, since there is no opinion formed by the AO in the re-opening of assessment on this issue. Accordingly, we upheld the reopening of assessment made by the AO. Treatment of expenditure on tools as capital expenditure - Held that - Sub-section (3) of section 211 provides that until the Central Government prescribes an accounting standard in consultation with the National Advisory Committee as set up under section 210A of the Companies Act, 1956, pursuant to a recommendation of the Institute of Chartered Accountants of India the Accounting Standard issued by the Institute of Chartered Accountants of India shall prevail. Therefore, we have no difficulty in accepting the submissions of learned counsel for the assessee that it was obliged to capitalise the entire cost of spares in consonance with the mandatory provisions of Accounting Standards (AS) 2 and (AS) 10. The assessee has been maintaining a mercantile system of accounting, therefore, the treatment of emergency spares in accordance with the revised Accounting Standard (AS) 2 and (AS) 10 would be in consonance with the mercantile system of accounting which under the Act the Revenue is required to look at for computing income of the assessee chargeable under the head Profits and gains from business. The submission of ld.D.R that the accounting treatment to be meted out to a transaction in accordance with the Accounting Standard has no relevance for the purposes of the Income-tax Act, 1961, is a submission which does not commend to us. Thus, expenditure on tools is to be allowed as revenue expenditure - Decided in favour of assessee.

Summary

Issues:
1. Reopening of assessment u/s.147 of the Act
2. Treatment of expenditure on tools as capital expenditure

Reopening of assessment u/s.147 of the Act:
The case involved appeals against the Commissioner of Income-tax (Appeals) order related to the assessment years 2008-09 & 2009-10. The primary issue was the reopening of assessment u/s.147 of the Act. The Assessing Officer (AO) reopened the assessment based on the disallowance and capitalization of an expenditure on replacement of tools under 'Manufacturing and other expenses.' The assessee contended that the reopening was merely a change of opinion and referred to the Supreme Court judgment in CIT Vs. Kelvinator of India Ltd. The Tribunal held that the reopening was justified within four years from the end of the relevant assessment year, as per Explanation-1 to sec.147 of the Act. It emphasized that the AO can reopen assessment if there is tangible material indicating income escapement, not merely a change of opinion. The Tribunal upheld the reopening, stating that it was not based on a formed opinion, and rejected the assessee's ground against the reopening for the assessment year 2008-09.

Treatment of expenditure on tools as capital expenditure:
The second common ground in both appeals was the treatment of expenditure on tools as capital expenditure. The assessee argued that tools like screw drivers and spanners, which have a short life and are replaced due to wear and tear, should be considered revenue expenditure. The Tribunal analyzed Accounting Standards (AS) 2 and 10, emphasizing that machinery spares should be treated as inventory if not specific to any fixed asset, and capitalized separately if specific and irregularly used. It noted that the revised Accounting Standards mandated capitalization of spares, and non-compliance required disclosure. The Tribunal accepted the assessee's submission, stating that the treatment of emergency spares aligned with the mercantile system of accounting, impacting income computation. Consequently, the expenditure on tools was allowed as revenue expenditure, and this ground of appeal was allowed.

In conclusion, the Tribunal partly allowed one appeal and fully allowed the other, emphasizing the importance of complying with Accounting Standards and distinguishing between revenue and capital expenditures in the assessment process.