2010 (6) TMI 55 - HC - Income Tax

Income Escaping assessment reopening of an assessment notice u/s 147 - The assessee filed a return of income for assessment year 2002-2003 on 30 October 2002 declaring a loss of Rs.46.96 lakhs and computed tax under Section 115JB of Rs.1.94 crores. An order of assessment was passed on 7 March 2005 under Section 143(3). On 18 March 2009, the Assessing Officer issued a notice under Section 148. project software and implementation services - AO claimed that The company has amortized Rs. 9,36,63,726/out of the amount of Rs.21,85,48,694/in the Accounts and also claim deduction of Rs.21,85,48,694/in computation of income while adding back the amortized amount. However, the said expenditure should have been treated as capital expenditure and the assessee has wrongly claimed the deduction towards such expenses. Held that that during the course of the assessment proceedings the assessee had made a full and true disclosure of all material facts in relation to the assessment. notice was issued on the basis of assessment records - Revenue has failed to establish before the Court that there was a failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment for assessment year 2002-2003 notice u/s 147 set aside.

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act, 1961.
2. Full and true disclosure of material facts by the assessee.
3. Specific grounds for reopening the assessment (four issues).

Detailed Analysis:

Validity of Reopening the Assessment under Section 147:
Section 147 empowers the Assessing Officer to reassess income that has escaped assessment. The proviso stipulates that reopening after four years from the end of the relevant assessment year is barred unless there was a failure by the assessee to disclose fully and truly all material facts necessary for the assessment. The court emphasized that the existence of a "reason to believe" conditions a valid exercise of statutory power under Section 147.

Full and True Disclosure of Material Facts by the Assessee:
The court highlighted that the assessee had made a full and true disclosure of all material facts necessary for the assessment. The reopening of the assessment was based entirely on the assessment records without any new material. The court referred to the precedent set in Cartini India Limited v. Additional Commissioner of Income Tax, which established that reopening based on the same material to take a different view is not permissible.

Specific Grounds for Reopening the Assessment:

1. Market Development and Sales Support Expenses:
- The assessee had engaged a wholly-owned subsidiary for market development and sales support in the US, remunerated on a cost-plus basis. The assessee treated Rs. 218.54 million as deferred over two years and amortized Rs. 9.36 crores in the accounts while claiming a deduction of Rs. 21.85 crores in the computation of income.
- The court noted that the assessee had made a full disclosure of these facts during the assessment proceedings. The Assessing Officer had specifically sought information on this issue, and the assessee had provided a detailed response. Therefore, the reopening on this ground was not justified.

2. Loss on Sale of Long-Term Investments:
- The assessee had disclosed a loss of Rs. 2.04 million on the sale of long-term investments but added back only Rs. 1.85 million to the income.
- The court found that the statement of total income included the net amount of Rs. 1.85 million, representing the netting off of the loss and profit on investments. The court held that the reasons for reopening did not justify the reopening as the Assessing Officer had not considered the objections raised by the assessee.

3. Prior Period Expenses:
- The Assessing Officer noted that Rs. 31.32 lakhs debited to the profit and loss account as prior period expenses were not allowable under the Act.
- The court observed that the assessee had provided a detailed note explaining the treatment of prior period expenses consistent with the Guidance Note issued by the Institute of Chartered Accountants of India. The court concluded that the assessee had made a full disclosure, and the reopening on this ground was not justified.

4. Interest on Fixed Loan:
- The assessee had debited Rs. 12.68 crores as interest on a fixed loan to the profit and loss account, which had not been capitalized.
- The court noted that the assessee had disclosed the interest expenses in the profit and loss account and provided an explanation that the interest expenses were for normal business activities and allowable under Section 36(1)(iii). The court found that the Assessing Officer had not considered this explanation, and the reopening on this ground was not justified.

Conclusion:
The court concluded that the Revenue failed to establish that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Consequently, the reopening of the assessment beyond four years was invalid. The petition was allowed, and the notice dated 18 March 2009 was set aside.

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