2023 (1) TMI 1034 - HC - Income Tax

Reopening of assessment u/s 147 - allocation of costs and the characterization thereafter has been deliberately camouflaged leading to a disclosure which is neither full nor true - characterization of the expenses to determine whether there has been a claim of ineligible pre-operative capital expenditures in respect of the years prior to 2015-16, when the Vizag unit of the petitioner commenced commercial production - HELD THAT - Details in regard to the expenditures incurred in connection with the Vizag segment and the manner of characterization of the same have been provided before the officer and in my view, the assessee has made a full disclosure of primary as well as secondary materials before both the Assessing and the Transfer Pricing Officers. There are instances where re-assessments are initiated based on information obtained from different units/sources with the Income Tax Department including the Criminal Investigation Department or All India Information. Queries may have been raised by those Departments and material may have been placed by assessee for their consideration. In such cases a probable view is that such materials as produced before those Departments have not come into the notice of the Assessing Authority for the determination of full and true disclosure. However, in this case all materials have admittedly been placed before the TPO who is integral to the conduct of assessment proceedings. All materials filed by an assessee before the TPO are well available as part of the assessment records. There has been a full and true disclosure by the petitioner as a result that proceedings for re-assessment beyond a period of four years must fail. The impugned order rejecting the objections of the petitioner to assumption of jurisdiction under Section 147, has taken recourse to Explanation 1 to Section 147 of the Act. Reiterating the view in M/s.Asianet Star Communications Private Limited 2019 (6) TMI 356 - MADRAS HIGH COURT hold that Explanation 1 cannot override the statutory condition under the proviso to Section 147. Explanation 1 would apply only in a situation where the materials filed by an assessee are so voluminous as make a proper verification nugatory, and the revenue establishes conscious intent on the part of the assessee to camouflage materials in the hope that such materials escape the attention of the authority. This is not the case of the revenue before me in the present matters. Thus the impugned orders and notices are set aside and these writ petitions are allowed.

Summary

Issues Involved:
1. Assumption of jurisdiction under Section 147 of the Income Tax Act.
2. Characterization of expenses as pre-operative capital expenditures.

Issue-wise Detailed Analysis:

1. Assumption of Jurisdiction under Section 147 of the Income Tax Act:
The petitioner, a pharmaceutical company, challenged the notices issued under Sections 148 and 143(2) for the assessment years 2012-13 and 2013-14. The petitioner had filed returns of income within the stipulated time, including necessary enclosures, and had engaged in international transactions that were referred to the Transfer Pricing Officer (TPO) for computation of arm's length price (ALP). The TPO, after thorough scrutiny and receiving segmental financial statements and explanations from the petitioner, made no adjustment towards the expenditure incurred. However, notices under Section 148 were issued on 02.07.2018, beyond the four-year limitation period. The petitioner contended that the reopening of assessment was invalid as there was full and true disclosure at the initial stage. The court noted that the Assessing Officer and the TPO had raised specific queries regarding the allocation of expenses to the Vizag unit, and the petitioner had provided detailed explanations and documentation. The court concluded that there was full and true disclosure by the petitioner, and hence, the reassessment proceedings beyond four years were invalid.

2. Characterization of Expenses as Pre-operative Capital Expenditures:
The petitioner had set up a new manufacturing facility in Vizag, which commenced production in FY 2015-16. Until then, direct expenses on assets under construction were capitalized, while indirect expenses were claimed as revenue expenditure. The TPO had raised queries regarding the allocation of expenses, and the petitioner had provided detailed explanations and proof of recovery of pre-operative expenditure upon commencement of operations. The TPO was convinced and made no adjustments. However, the Assessing Officer later issued reassessment notices, claiming that the expenses related to the Vizag unit should have been treated as pre-operative and capital in nature, not revenue expenditure. The court observed that the petitioner had provided all relevant details and explanations to the TPO, who had accepted the petitioner's claims. The court held that the petitioner had made a full disclosure of primary and secondary materials, and the reassessment based on the same information was unjustified.

Conclusion:
The court held that the petitioner had made full and true disclosure of all relevant materials before the Assessing Officer and the TPO. The reassessment proceedings initiated beyond the four-year limitation period were invalid. The impugned orders and notices were set aside, and the writ petitions were allowed.