2020 (1) TMI 562 - HC - Income Tax

Reopening of assessment u/s 147 - contention of the assessee is that the matters were plain and obvious and adequate information was available to the assessing officer at the time of the initial order u/s 143 and the impugned notice here and the accompanying reasons would tantamount to a change of opinion rather than the new discovery of material that could not have been reasonably noticed at the time of the scrutiny - HELD THAT - The accounts are somewhat convoluted as regards royalty. While it is possible that it may be difficult for the assessee to immediately discover the persons entitled to receive the royalty on account of the licence fees earned by the assessee or the quantum of royalty payable to such persons, it is evident that the provision made to carry forward a certain amount during a financial year almost invariably substantially exceeds the pay-out during the following year. Indeed, the provision must necessarily be in excess of the pay-out; but the difference between the quantum of provision and the extent of pay-out may be of some consequence. The notice does not pertain to such aspect of the matter and the recorded reasons reveal that the assessing officer may have mixed up between the royalties paid or payable by the assessee for its sound recordings and the royalty paid or payable by the assessee in respect of the licence fees earned. As to the provision part of the accounts pertaining to royalty in respect of licence fees, there was a specific note in the accounts and schedule 28 to the accounts was quite clear. If the accounts were before the assessing officer and several queries were raised pertaining even to the royalty and matters connected therewith, it is difficult to accept that the additional income representing the excess of the amount earmarked as provision and the amount actually paid out would not have been noticed. If such matter had been noticed, as it ought to have been, and disregarded, the issuance of the impugned notice would amount to a change of opinion and not discovery of any new material revealing income escaping assessment. Prima facie, that appears to be the position from the reasons recorded in support of the decision to reopen the assessment for the relevant financial year. As a consequence, the impugned notice dated March 28, 2019 will remain stayed pending disposal of the petition before the court of the first instance. The order impugned is modified accordingly.

Summary

Issues:
Challenge to notice under Section 148 of the Income Tax Act, 1961 for reassessment of income for the assessment year 2012-13 based on income escaping assessment.

Analysis:
The appeal before the Calcutta High Court arose from the refusal of an ad interim order by the vacation Bench regarding a notice issued under Section 148 of the Income Tax Act, 1961. The notice was for reassessing the income of the writ petitioner assessee for the assessment year 2012-13 on the grounds that income chargeable to tax had escaped assessment. The assessee claimed to be engaged in the business of producing sound recordings of music and issuing licenses for the same. The accounting related to royalty payments was maintained on a mercantile basis, with provisions made at the end of each financial year for royalty payments to original artists. The notice was prompted by discrepancies in the provision made for royalties and the purchase price shown in the assessee's books.

Regarding the provision for royalty payments, the assessee contended that the information was already available to the assessing officer during the initial assessment under Section 143 of the Act. The assessee argued that the impugned notice and accompanying reasons represented a change of opinion rather than the discovery of new material. The accounts pertaining to royalty were somewhat convoluted, but the assessing officer should have noticed the excess provision compared to the actual pay-out. The notice seemed to mix up royalties paid for sound recordings and royalties paid for license fees earned by the assessee.

The High Court observed that if the assessing officer had already considered and disregarded the excess provision during the initial assessment, issuing the impugned notice would amount to a change of opinion rather than the discovery of new material. Consequently, the Court stayed the impugned notice pending the disposal of the petition before the court of the first instance. The order was modified accordingly, and directions were given for the filing of affidavits within specific timelines. The matter was disposed of without any order as to costs, and certified website copies of the order were to be provided to the parties upon request.