2017 (6) TMI 139 - HC - Income Tax

Validity of reopening of assessment - existence of reasons to believe - capitalization of expenses - Held that - In the present case, the tangible material that the AO came across for the AYs in question that warranted the reopening of the assessments is not clear from the reasons to believe recorded by the AO. The reasons merely record the fact that HML had borne the costs and expenses including professional fee and, therefore, the capitalization of those expenses to the various block of assets was not allowable under Section 43(1) of the Act. After recording the above statement, the AO adds I have reason to believe that due to failure on the part of the assesse to disclose all the material facts truly or fully, income of ₹ 7,16,299 have escaped assessment. This does not satisfy the requirement of law that the reasons to believe should, where the reopening is after the expiry of four years from the end of the FY, specifically state in what manner there was a failure by the Assessee to make a full and true disclosure of material facts. That, again, will have to be preceded by spelling out the tangible fresh material that led the AO to come to that conclusion. None of this is found in the reasons to believe recorded by the AO in the case on hand. The necessity for tangible material to be present to trigger the reopening was emphasized in Commissioner of Income tax v. Orient Craft Ltd. (2013 (1) TMI 177 - DELHI HIGH COURT ). The repeated assertion by Mr. Manchanda that the claim for depreciation for AYs 2006-07 and 2007-08 was disallowed by the AO is not entirely correct. It overlooks the history of the litigation around the claims for those AYs with both ending in the Assessee ultimately succeeding on the point after the remand to the AO by the ITAT for AY 2006-07 and the level of the CIT (A) for AY 2007-08 . Mr. Manchanda has also not been able to counter the submission that for AYs 2011-12 and 2012-13 the same claim for depreciation has been allowed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the reopening of assessments under Section 148 of the Income Tax Act, 1961 for AYs 2008-09, 2009-10, and 2010-11.
2. Whether there was a failure on the part of the Assessee to disclose fully and truly all material facts necessary for assessment.
3. Validity of the claim for depreciation on professional and legal charges capitalized as part of the block of assets.

Detailed Analysis:

1. Legality of the Reopening of Assessments:
The core issue revolves around the legality of the reopening of assessments for AYs 2008-09, 2009-10, and 2010-11 under Section 148 of the Income Tax Act, 1961. The court found that the reopening was based on the AO's belief that the Assessee failed to disclose material facts fully and truly. However, the court noted that there was a history of litigation around the claim for depreciation starting from AY 2006-07. The court emphasized that a mere change of opinion on the same material that was already available with the Revenue does not justify reopening. The court cited the Supreme Court's decision in Commissioner of Income tax v. Kelvinator of India Ltd., which requires "tangible material" to justify reopening assessments. The court concluded that no such tangible material was presented by the AO.

2. Failure to Disclose Material Facts:
The court examined whether the Assessee failed to disclose all material facts necessary for assessment. The court observed that from AY 2006-07 onwards, the Revenue was aware of the claim for depreciation made by allocating professional and legal charges to the block of assets. The court found that the Assessee had consistently disclosed the basis for the claim of depreciation, and there was no fresh material to disclose for AYs 2008-09 and 2009-10. The court rejected the Revenue's argument that each assessment year is different and that the AO was not obliged to look into previous records, emphasizing that the AO should have examined the history of the case.

3. Validity of the Claim for Depreciation:
The court addressed the validity of the claim for depreciation on professional and legal charges capitalized as part of the block of assets. The court noted that the CIT (A) had allowed the claim for AY 2007-08, and this decision had attained finality as the Revenue's appeal was not entertained due to the monetary effect being below the permissible limit. The court also noted that the same claim for depreciation had been allowed for AYs 2011-12 and 2012-13. The court found that the AO's reasons for reopening the assessments did not satisfy the legal requirement of specifying how the Assessee failed to make a full and true disclosure of material facts. The court concluded that there was no fresh material to justify the reopening of assessments for the AYs in question.

Conclusion:
The court allowed the writ petitions, setting aside the notices dated 31st March 2015 and the consequential orders dated 11th January 2016 passed by the AO. The court held that the reopening of assessments was not justified as it was based on a mere change of opinion without any tangible material. The court emphasized the necessity for tangible material to trigger reopening and found that the Assessee had made full and true disclosure of all material facts necessary for assessment.