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2020 (11) TMI 66 - AT - Income TaxReopening of assessment u/s 147 - Tangible material - HELD THAT - Reopening of assessment being based on a mere change of opinion, the assumption of jurisdiction on the part of the A.O. lacks validity and the notice u/s 148 of the Act cannot be sustained. AO has power to reopen the assessment, provided there is tangible material to come to the conclusion that there is escapement of income from assessment and the reasons must have a live link with the formation of belief. In the present case, there is no tangible material. The issuance of the impugned notice u/s.148 is nothing but mere change of opinion. In absence of any new tangible material available with the A.O., it is not open to the A.O. to change his opinion by issuing the notice of re-assessment. From the reasons recorded it can be said that the original assessment is sought to be reopened in exercise of powers under section 147/148 of the Act on change of opinion by the AO, which is not permissible more particularly when the original assessment is sought to be reopened after a period of four years from the end of the assessment year. Under the circumstances, the conditions stipulated under first proviso to section 147 are not satisfied and therefore, on the aforesaid ground alone, the impugned notice deserves to be quashed and set aside. There was no full and true disclosure at the end of the Assessee of the material fact necessary for the purpose of assessment. In such circumstances, it can be said that there was no tangible material for the purpose of reopening the assessment except change of opinion. Hence in our opinion, there was no fault on the part of assessee to disclose full and truly all the material facts necessary for the assessment. Reopening of assessment which is already concluded under Section 143(3) of the Act of the assessment cannot be reopened without any allegation by the Assessing Officer that there was non-disclosure of true and correct facts by the assessee while framing the original assessment. Hence we are inclined to annul the assessment. Disallowance of expenditure relating to design and development expenses - Revenue or capital expenditure - HELD THAT - The assessee incurred this expenditure towards design and development. The assessee itself treated it as capital expenditure by amortising the same over a period of use of an asset or five years whichever is lower. Contrary to this the learned Authorised Representative made an argument that this is an expenditure incurred in day to day running of the business and eligible for deduction under Section 37 of the Act. Being so, the expenditure is in capital nature and it cannot be allowed as revenue expenditure. However he submitted that alternative argument that the assessee is entitled for depreciation on the same at applicable rate. Accordingly, we direct the Assessing Officer to grant depreciation at applicable rate since he has treated as capital expenditure. This ground of assessee is partly allowed. Disallowance of R D expenses on the ground that the said expenditure brings value addition and benefit of enduring nature - contention of the assessee that these Books of Accounts cannot be conclusive for the purpose of Income Tax assessment and the entire R D expenditure is in the revenue filled and entire expenditure has to be allowed - HELD THAT - Assessee is not able to substantiate the above expenditure on in-house is related to carrying out day to day business of the assessee. Being so, in our opinion the capital portion of the R D expenditure cannot be allowed as revenue expenditure. However the assessee has raised alternative contention that it is regarded as a capital expenditure, the same has to be allowed as deduction under Section 35(1)(iv) of the Act, the same be allowed as deduction or grant depreciation on the said expenditure. Regarding deduction under Section 35(1)(iv) of the Act, the assessee has not placed any evidence in support of the claim. The same is rejected. However we consider the alternative ground of the assessee and set aside the matter to the file of Assessing Officer to grant depreciation on it. Accordingly, this ground of appeal is partly allowed for all the Assessment Years under consideration. Disallowance of sales commission - HELD THAT - The assessee made provision towards sales commission and same is disallowed by the Assessing Officer on the reason that no evidences and documents were submitted to substantiate the claim of the assessee or how the prices are created towards unknown liability which does not exist at the time of creation.Before us, no evidence is furnished to show that the basis towards non-existing liability. Interest disallowance - additional ground admission - HELD THAT - This interest expenditure was with regard to on account of loans availed which was invested in capital work in progress and as an addition to fixed assets. Being so, this is in capital field and no interest could be allowed as revenue expenditure. The lower authorities are justified in treating the claim of the assessee as capital work in progress. Considering the additional ground on the reason that there is good and sufficient reason for not raising this additional ground inadvertently. Accordingly, we admit the additional ground and accede to the belief of the ld. AR and the assessee is entitled for consequential depreciation on capitalization in the year capital work in progress by the assessee at applicable rate. We direct the Assessing Officer to allow consequential depreciation. This ground of assessee is partly allowed. Disallowance of reimbursement of expenses - tax has not been withheld on the reimbursement of expenses - HELD THAT - Before us, the assessee has not substantiated that the assessee has deducted tax on the said reimbursement of expenditure. Being so, we are not in a position to allow this expenditure.
Issues Involved:
1. Reopening of assessment. 2. Disallowance of expenditure relating to design and development expenses. 3. Disallowance of R&D expenses. 4. Disallowance of provision for warranty. 5. Disallowance of sales commission. 6. Interest disallowance. 7. Disallowance of reimbursement of expenses. Issue-wise Detailed Analysis: 1. Reopening of Assessment: The first ground concerns the reopening of assessment for the year 2005-06. The assessee argued that the reopening was invalid as it was done after four years without any new material, constituting merely a change of opinion. The original assessment was completed under Section 143(3) of the Act. The assessee cited several judgments, including CIT Vs. Kelvinator of India Ltd. (320 ITR 561 SC), which state that reopening based on a mere change of opinion is not permissible. The Tribunal observed that the reasons recorded for reopening did not indicate any failure on the part of the assessee to disclose fully and truly all material facts. The Tribunal concluded that the reopening was based on a mere change of opinion, lacking any new tangible material, and thus annulled the reassessment. 2. Disallowance of Expenditure Relating to Design and Development Expenses: The assessee claimed these expenses as revenue expenditure under Section 37(1) of the Act. The Revenue treated them as capital expenditure, arguing that they brought enduring benefits. The Tribunal noted that the assessee had itself amortized these expenses over five years in its books, indicating their capital nature. Consequently, the Tribunal upheld the treatment as capital expenditure but directed the Assessing Officer to grant depreciation on the same. 3. Disallowance of R&D Expenses: The assessee argued that R&D expenses were revenue in nature, incurred for day-to-day business improvements. The Revenue contended that these expenses created enduring benefits and were capital in nature. The Tribunal observed that the assessee had treated a portion of these expenses as capital in its financial statements. The Tribunal upheld the disallowance of the capital portion as revenue expenditure but directed the Assessing Officer to grant depreciation on the capitalized amount. 4. Disallowance of Provision for Warranty: This ground was not pressed by the assessee during the hearing, and thus, the Tribunal dismissed this ground. 5. Disallowance of Sales Commission: The assessee's provision for sales commission was disallowed due to lack of evidence. The Tribunal noted that no evidence was furnished to substantiate the claim, and thus, upheld the disallowance. 6. Interest Disallowance: The assessee's interest expenditure on borrowed funds was disallowed on the grounds that it was used for capital work in progress. The Tribunal upheld the disallowance, agreeing that the interest was capital in nature. However, the Tribunal admitted additional grounds raised by the assessee for consequential depreciation on the capitalized interest and directed the Assessing Officer to allow such depreciation. 7. Disallowance of Reimbursement of Expenses: The disallowance was due to the failure of the assessee to withhold tax on the reimbursement of expenses. The Tribunal upheld the disallowance as the assessee did not substantiate the deduction of tax on these expenses. Conclusion: The Tribunal allowed the appeal concerning the reopening of assessment (ITA No.2181/Bang/2018) and partly allowed the appeals concerning the other issues (ITA Nos.2182 to 2189/Bang/2018), directing appropriate reliefs such as depreciation on capitalized expenses.
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