2021 (2) TMI 1162 - HC - Income Tax

Reopening of assessment u/s 147 - Disallowance of non - compete fees - Whether amount incurred towards a sum under two agreements to the two companies was towards non compete fees for a short period and therefore were in the nature of a revenue expenditure? - HELD THAT - As earlier a collaboration agreement dated 07.11.1977 was entered into between the petitioner and the Chicago Pneumatic Tool Company which had granted a license and know how to manufacture and sell the specified products which was being transferred permanently. Clause 2.4 which has been extracted above also seems to indicate that the license granted by the Chicago Pneumatic Tool Company to the petitioner was perpetual and that the petitioner was free to license the right to manufacture and sell the specified products and to disclose, impart and supply the know how received by it under the Collaboration Agreement to any person. Valuation in the Agreement has not been clearly explained by the petitioner. In the above background, it is to be noted that when the detailed questionnaire was issued by the Assessing Officer under Section 143(2) of the Income Tax Act, 1961 to the petitioner, in its reply dated 25.01.2005, the petitioner did not make true and full disclosure inasmuch as reference to Clause 2.4 of the II Agreement dated 17.08.2002 was not made. Though it was submitted that the Indian Company, namely Atlas Copco India Limited had paid a sum of ₹ 15 Crores to the petitioner, it is noticed from the Annual Report filed for the financial year ending on 31.03.2005 that only a sum of ₹ 1,50,000/- was paid under the II Agreement dated 17.08.2002. Further, it is also not clear whether the tax was indeed paid in the returns filed for the previous year 2004-2005/for the Assessment Year 2005-2006 as the total income declared was about ₹ 9 Crores. Therefore, there are also disputed questions of facts involved in the present case as to whether the tax has been paid by the petitioner during the succeeding assessment years. In our view, the decision of the Hon ble Supreme Court in Indi-Aden Salt Mfg. Trading Co. (P.) Ltd. Vs. Commissioner of Income Tax 1986 (3) TMI 342 - SUPREME COURT cited by the learned counsel for the respondent squarely applies to the facts of the present case. I therefore conclude that the respondent had correctly invoked the jurisdiction under Section 148 for the purpose of Proviso 2 to Section 147 of the Income Tax Act, 1961.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act, 1961.
2. Alleged failure of the petitioner to disclose fully and truly all material facts necessary for the assessment year 2003-2004.
3. Nature of the expenditure claimed by the petitioner (revenue vs. capital).

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:
The primary issue in this case is whether the reopening of the assessment by the Assessing Officer (AO) under Section 147 of the Income Tax Act, 1961, was valid. The petitioner argued that there was no failure on their part to disclose all material facts necessary for the assessment year 2003-2004. The AO, however, believed that income had escaped assessment due to the petitioner’s omission to disclose certain material facts fully and truly. The court noted that the AO must have "reason to believe" that some income chargeable to tax had escaped assessment due to the assessee's failure to make a return or disclose fully and truly all material facts. The court cited Supreme Court precedents, including Sri Krishna P. Ltd. Vs. ITO and Indo Aden Salt Mfg Co. & Trading Co. P. Ltd. V CIT, which emphasize the duty of the assessee to make full and true disclosure of all material facts.

2. Alleged Failure to Disclose Material Facts:
The AO contended that the petitioner failed to disclose the true intention behind Clause 2.4 of the second agreement, which indicated that part of the payment was for a perpetual license to manufacture and sell products, making it capital in nature. The petitioner had claimed the entire payment as revenue expenditure. The court observed that the petitioner did not mention this clause in their detailed note submitted during the original assessment, which constituted a failure to disclose fully and truly all material facts. The court referenced the Supreme Court's decision in Calcutta Discount Co. Ltd. Vs. Income Tax Officer, which emphasized the assessee's duty to disclose all primary facts relevant to the assessment.

3. Nature of the Expenditure (Revenue vs. Capital):
The petitioner argued that the payments made under the agreements were for non-compete fees and thus should be treated as revenue expenditure. The AO, however, found that part of the payment was for a perpetual license, making it capital in nature. The court noted that the agreements and the payments made were not clearly explained by the petitioner. The AO's detailed questionnaire under Section 143(2) was not fully and truly answered by the petitioner, particularly regarding Clause 2.4 of the second agreement. The court concluded that the AO had valid reasons to believe that income had escaped assessment due to the petitioner's failure to disclose material facts fully and truly.

Conclusion:
The court dismissed the Writ Petition, upholding the AO's decision to reopen the assessment under Section 147. The court directed the AO to pass a re-assessment order within three months, ensuring that the petitioner is heard in accordance with the law. The AO is to confine the re-assessment to the reasons given for reopening the assessment as communicated on 05.03.2010. The court clarified that the observations made in the judgment are only for determining the validity of the reopening and do not influence the final re-assessment order.