2017 (7) TMI 814 - HC - Income Tax

Reopening of assessment - notice issued to the petitioner on the ground that the items on account of interest and royalty, which are allowed as revenue expenditure in the assessment order, are on wrong premise - Held that - It has been consistently held by the Apex Court and this Court that mere change of opinion cannot be the reason to believe to reopen the assessment. This Court in a case of GKN Sinter Metals Ltd. (2015 (1) TMI 832 - BOMBAY HIGH COURT) has extensively dealt with the law in this regard and after referring to the various judgments of the Apex Court and this Court observed that mere change of opinion cannot be the basis of reopening the assessment. In the said case also, the Assessing Officer had raised the query with regard to allocation of expenditure. The petitioner gave its reply. The Assessing Officer accepted the reply and assessment order was passed. Thereafter, notice for reopening the assessment was issued. In the present case the Assessing Officer before passing the assessment order, had raised queries precisely with regard to the interest and royalty being shown as revenue expenditure. The Assessing Officer was satisfied with the reply and thereafter passed assessment order. Notice u/s 148 is issued merely because another Assessing Officer has different opinion. It is not the case that any income has escaped assessment. The notice is issued merely upon the change of opinion of the Assessing Officer, which is not permissible. - Decided in favour of assessee.

Summary

Issues involved: Assessment based on interest and royalty as revenue expenditure for Assessment Year 2002-03, validity of notice under Section 148 of the Income Tax Act, 1961 for reopening assessment, application of the principle of 'reason to believe' for reopening assessment based on change of opinion.

Analysis:
1. Assessment based on interest and royalty as revenue expenditure for Assessment Year 2002-03:
The petitioner challenged the notice issued by the respondent under Section 148 of the Income Tax Act, 1961 for the Assessment Year 2002-03. The impugned notice sought to reopen the assessment based on the grounds that interest attributable to capital work in progress and royalty payment made to a foreign company were wrongly allowed as revenue expenditure. The petitioner argued that similar claims were allowed in previous assessment years and the Assessing Officer had accepted the explanations provided by the petitioner during the assessment process. The petitioner contended that the reopening of assessment solely based on a change of opinion was not justified.

2. Validity of notice under Section 148 for reopening assessment:
The respondent supported the order and argued that the Assessing Officer had erroneously considered the interest and royalty as revenue expenditure during the assessment process. It was contended that the interest should have been capitalized as it was incurred in the expansion of capital, and the royalty payment was a capital expenditure for acquiring technology. The respondent claimed that a reasonable belief was formed by the Assessing Officer to issue the notice under Section 148 of the Act based on the incorrect treatment of these items as revenue expenditure in the assessment order.

3. Application of the principle of 'reason to believe' for reopening assessment based on change of opinion:
The High Court analyzed the submissions of both parties and emphasized that a mere change of opinion cannot be the basis for reopening an assessment. Referring to previous judgments, the Court reiterated that the Assessing Officer's satisfaction during the assessment process should not be overturned merely because a different opinion is held by another Assessing Officer. The Court held that as there was no income that had escaped assessment and the notice was issued solely based on a change of opinion, it was impermissible. Relying on legal precedents, the Court quashed and set aside the impugned notice, ruling in favor of the petitioner.

In conclusion, the High Court's judgment emphasized the importance of maintaining consistency and adherence to legal principles in reopening assessments, highlighting that a change of opinion alone cannot justify such action. The decision provided clarity on the application of the 'reason to believe' principle and reiterated the significance of upholding the initial assessment unless there are substantial grounds for reassessment.