2020 (8) TMI 277 - HC - Income Tax

Reopening of assessment u/s 147 - assumption of jurisdiction to re-assess the income of the petitioner - reasons for re-assessment are premised upon the classification of the royalty paid by the assessee being 'capital' in nature, as against the claim of it being 'revenue' in nature, by the assesssee/petitioner - HELD THAT - All details relating to the payment of royalty have been supplied by the assessee commencing from the disclosures in the annexures to its return of income Queries and responses specific to the aforesaid issue were exchanged between the petitioner on the one hand and the TPO and AO on the other. Supporting evidences for the petitioners claim that the royalty was running royalty and thus revenue in nature was also filed. This issue has engaged the attention of the respondents since the TPO has specifically raised a query with regard to the classification of royalty as capital vis-a-vis revenue and sought an explanation in this regard. Relevant details being on record and having engaged the attention of the officers of the Department, this is not a case where the alleged escapement can be attributed to any failure on the part of the assessee/petitioner. Perusal of the reasons extracted elsewhere in this order only referred to the issue of classification of royalty on merits and nowhere it is stated that there has been any failure by the petitioner in making a disclosure in this regard. To be fair to the Assessing Officer, he does not even make such allegation in the reasons for re-assessment and rightly so, since the material available would show a full disclosure by the petitioner at all stages of assessment. The impugned order dated 26.08.2019 rejecting the objections to assumption of jurisdiction is liable to be quashed. As decided in PARASHURAM POTTERY WORKS CO. LIMITED VERSUS INCOME-TAX OFFICER, CIRCLE I, WARD A, RAJKOT 1976 (11) TMI 1 - SUPREME COURT hallmark of a civilized society is one that allows stale issues to rest without feeling the need to rake the same up repeatedly. So far as income-tax assessment orders are concerned, they cannot be reopened on the scope of income escaping assessment under section 147 of the Act of 1961 after the expiry of four years from the end of the assessment year unless there be omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. WP allowed.

Summary

Issues:
1. Challenge to the assumption of jurisdiction to re-assess income under the Income Tax Act, 1961 for A.Y. 2013-14.

Analysis:
The petitioner challenged an order rejecting objections to re-assess the income under the Income Tax Act for A.Y. 2013-14. The petitioner filed a return of income accompanied by necessary annexures, including the Transfer Pricing Report detailing royalty payments to an associated enterprise. The matter was referred to the Transfer Pricing Officer (TPO) for determination of Arms Length Price (ALP). The TPO issued notices and queries regarding international transactions and royalty payments. The petitioner provided complete details and explanations regarding the royalty payments, asserting they were revenue expenditure. The TPO's order considered the royalty payments in the computation of ALP, leading to a downward adjustment in the final assessment.

The order of assessment noted the adjustment recommended by the TPO related to royalty payments. Subsequently, the petitioner received a notice for re-assessment under Section 148, questioning the jurisdiction of the Assessing Officer. The reasons provided for re-opening the assessment highlighted the classification of royalty payments as capital expenditure, contrary to the petitioner's claim of revenue expenditure. The re-assessment was initiated beyond the four-year limit, necessitating satisfaction of conditions under Section 147 of the Act.

The court emphasized that the alleged escapement of income should be attributable to the assessee's failure to disclose fully and truly all material facts. In this case, the petitioner had made full disclosures regarding royalty payments throughout the assessment process. The reasons for re-assessment focused on the classification of royalty payments, with no indication of failure to disclose by the petitioner. Therefore, the court quashed the order rejecting objections to the assumption of jurisdiction, citing the need for finality in legal proceedings and the importance of not reactivating stale issues beyond a certain point.

The judgment referenced the Supreme Court's decision in The Parashuram Pottery Works Co. Ltd. case, highlighting the importance of finality in legal proceedings and the need for repose in judicial controversies. The court allowed the writ petition, with no costs, and closed the connected Miscellaneous Petitions.