2018 (6) TMI 1447 - AT - Income Tax

Reopening of assessment - treatment to royalty - Held that - The assessee has disclosed all material facts relating to the issue of Royalty on which the reopening has been resorted to. The case laws relied upon by the Ld. DR , we hold, therefore merit no consideration. 20. We also find merit in the contention of the Ld.Counsel for the assessee that there was no reason at all for reopening the case on the issue of treatment of royalty expenses ,since the same had already been decided in favour of the assessee by the ITAT, before the recording of reasons for reopening the present case. In fact, the ITAT had decided the issue in the very same assessment year, which assessment order had formed the basis for reopening the case i.e A.Y 2009-10. The AO could not have any reasons to believe that income had escaped assessment when the very basis of its belief, being the assessment order of a subsequent year, had been reversed by the ITAT before the recording of reasons by the AO - the order passed under section 147 was invalid - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of the reassessment proceedings under section 147 of the Income Tax Act.
2. Treatment of royalty expenses as capital or revenue expenditure.

Issue-wise Detailed Analysis:

1. Validity of the reassessment proceedings under section 147 of the Income Tax Act:

The primary contention of the assessee was that the reassessment proceedings were initiated in violation of the conditions prescribed in the proviso to section 147 of the Act. The proviso states that no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year unless any income chargeable to tax has escaped assessment due to the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.

The assessee argued that the notice for initiation of reassessment proceedings for AY 2008-09 was issued on 30/03/2015, after a lapse of four years from the end of the relevant assessment year. The original assessment had been made under section 143(3) of the Act, and the reassessment could only be initiated if the assessee had failed to disclose fully and truly all material facts necessary for the assessment. The assessee contended that all material facts related to royalty expenses had been disclosed during the original assessment proceedings, including the submission of the Royalty License Agreement and other relevant documents.

The Tribunal noted that the reopening was based on the claim of the assessee of royalty expenses as revenue, which the AO had treated as capital in nature in subsequent years. The Tribunal found that the issue of royalty expenses had been examined in detail during the original assessment proceedings by the Transfer Pricing Officer (TPO), who had discussed the nature and purpose of the royalty agreement. The Tribunal concluded that the assessee had disclosed all primary facts pertaining to the royalty expenses, and there was no suppression or misrepresentation of facts. The reasons recorded by the AO for reopening did not reveal any failure on the part of the assessee to disclose material facts.

The Tribunal relied on the judgment of the jurisdictional High Court in the case of State Bank Of Patiala Vs. Commissioner of Income Tax (2015) 375 ITR 109 (P&H), which held that where the reasons for reopening do not show any failure on the part of the assessee to disclose fully and truly all material facts, the reopening is not valid. The Tribunal held that the reassessment proceedings were not validly invoked and quashed the order passed in consequence thereto by the AO.

2. Treatment of royalty expenses as capital or revenue expenditure:

The Tribunal did not consider it necessary to deal with the merits of the case regarding the treatment of royalty expenses as capital or revenue expenditure, as it had already quashed the reassessment order on the legal ground. The Tribunal noted that the issue of royalty expenses had already been decided in favor of the assessee by the ITAT in the assessment year 2009-10, which was the basis for reopening the case for AY 2008-09. The AO could not have any reasons to believe that income had escaped assessment when the very basis of its belief had been reversed by the ITAT before the recording of reasons by the AO.

Conclusion:

The Tribunal allowed the Cross Objection filed by the assessee, holding that the reassessment proceedings under section 147 were invalid. Consequently, the Tribunal quashed the assessment order passed by the AO. The appeal of the Revenue was dismissed, and the Cross Objection filed by the assessee was allowed.