2022 (3) TMI 676 - HC - Income Tax

Reopening of assessment u/s 147 - whether the non-compete fee should be treated as revenue expenditure or capital expenditure? - amount paid for non-compete fee rights while acquiring a business is a capital expenditure and, therefore, though a receipt of non-compete fee is treated as revenue expenditure, the payer cannot claim as revenue expenditure but claim only as a capital expenditure - HELD THAT - The entire reason to re-open is the basis of the decision of 2010 (7) TMI 685 - ITAT, DELHI . Almost four months later, the assessment proceedings have proceeded and by a letter dated 30th November, 2010, Petitioner has explained why the non-compete fee paid should be treated as revenue expenditure and not capital expenditure and has also relied on various decisions of High Courts to justify its stand. AO was satisfied with the explanation of Petitioner and decided to allow non-compete fee paid to be treated as revenue expenditure. Just because it has not been discussed in the Assessment Order, it does not mean that the issue was not a subject of consideration during assessment proceedings. As held by this Court in the case of Aroni Commercials Ltd . 2014 (2) TMI 659 - BOMBAY HIGH COURT it is not necessary that an Assessment Order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. During assessment proceedings, once query is raised and the assessee has replied to it, it follows that the query raised raised was a subject of consideration of the Assessing Officer while completing the assessment. The very issue of how to treat the non-compete fee paid by assessee was a subject matter of consideration by the Assessing Officer during assessment proceedings leading to the Assessment Order dated 30th November, 2010. It would, therefore, follow that the re-opening of the assessment by the impugned notice dated 20th March, 2013 is merely on the basis of change of opinion by the Assessing Officer from that held earlier during course of assessment proceedings leading to the order dated 30th November, 2010. This change of opinion does not constitute the decision and/or reasons to believe that income chargeable to tax has escaped assessment - Decided in favour of assessee.

Summary

Issues:
Impugning a notice under Section 148 of the Income Tax Act, 1948 and order rejecting objections to the reopening of the Assessment.

Analysis:
The petitioner challenged a notice dated 20th March, 2013, issued under Section 148 of the Income Tax Act, 1948, and an order dated 24th January, 2014, rejecting objections to the reopening of the Assessment for the year 2008-09. The petitioner, engaged in the business of manufacturing and selling paints, acquired a business on a slump sale basis and paid a non-compete fee. The Assessing Officer initially accepted the treatment of this fee as revenue expenditure in the assessment order dated 30th November, 2010. However, the notice to reopen the assessment was solely based on a decision of the ITAT Special Bench, New Delhi, which held such fees to be capital expenditure. The petitioner argued that the issue of how to treat the non-compete fee was thoroughly discussed during the assessment proceedings, and various High Court decisions supported treating it as a revenue expenditure. The petitioner contended that the Assessing Officer should have been aware of the ITAT decision but chose to accept the petitioner's explanation and High Court decisions instead.

During the hearing, the petitioner's counsel emphasized that the Assessing Officer should have considered the ITAT decision but chose not to, relying on High Court decisions supporting the treatment of the non-compete fee as a revenue expenditure. The respondent's counsel argued that since the assessment order did not discuss this issue, it cannot be assumed that the Assessing Officer was aware of the ITAT decision. The High Court agreed with the petitioner's submissions, stating that the reason to believe for reopening the assessment lacked tangible material and was solely based on the ITAT decision. The High Court cited a previous case to support the argument that if a query is raised during assessment proceedings and the assessee responds, it implies that the query was considered by the Assessing Officer, even if not explicitly mentioned in the assessment order.

Ultimately, the High Court set aside the notice and order rejecting the objections, stating that the reopening of the assessment was merely a change of opinion by the Assessing Officer and did not constitute valid reasons to believe that income had escaped assessment. The High Court held that the issue of how to treat the non-compete fee was adequately considered during the original assessment proceedings, and the Assessing Officer's decision to reopen the assessment was based on a change of opinion rather than new evidence or valid reasons to believe income had escaped assessment. The petition was allowed, and no costs were awarded.