2012 (4) TMI 239 - HC - Income Tax

Striking down the reassessment proceedings initiated u/s 147/148 - change of opinion - respondent filed return of income including capital gain - the assessee has debited a sum of ₹ 2,86,74,323/- under the head of royalty and ₹ 10,73,766/- under the head technicians fee in the P & L a/c ending 31.3.2000 - As per revenue 25% of the royalty expenses should be considered as capital expenditure in view of the Supreme Court judgment in Southern Switchgear Ltd. 1997 (12) TMI 105 - SUPREME Court - The assessee is also entitled for royalty fee right and license to use the trademarks within the territory. The acquisition of such a right may be treated partly towards capital and partly towards the revenue thus failure on the part of the assessee to disclose truly and fully all mat erial facts - Held that - Respondent assessee has filed the profit and loss account wherein royalty has been specifically shown in Schedule 13 in a separate heading, manufacturing and other sale expenses . This fact is also admitted in the reasons to believe itself - reading of the assessment order along with profit and loss account indicates that the expense/question of payment of royalty was examined before the assessment order u/s 143(3) was passed - there was no failure or omission on the part of the respondent assessee to disclose the head and the quantum thereof - Even TDS certificates and other details were filed -the Revenue has not been able to indicate and state, the specific failure or omission on the part of the respondent assessee to disclose fully and truly the material facts - that the present case falls in the category of change of opinion as at the time of original proceedings the AO examined and gone into the question of royalty - Appeal or revenue dismissed.

Summary

Issues Involved:
1. Validity of reassessment proceedings under sections 147/148 of the Income Tax Act, 1961.
2. Whether the reassessment was based on a "change of opinion".
3. Whether there was a failure on the part of the assessee to fully and truly disclose material facts.

Detailed Analysis:

1. Validity of reassessment proceedings under sections 147/148 of the Income Tax Act, 1961:
The High Court examined the reassessment proceedings initiated by the Revenue for the assessment years 2000-01 and 2001-02. The Tribunal had struck down these proceedings on the grounds of change of opinion. The Court noted that the reasons for reopening the assessment were related to the classification of royalty expenses as revenue expenditure instead of capital expenditure. The reassessment notices were issued on 29.03.2007 and 13.07.2005 for the respective years. The Court scrutinized the reasons provided by the Assessing Officer for reopening the assessments, which cited the Supreme Court judgment in Southern Switchgear Ltd. as a basis for treating part of the royalty expenses as capital expenditure.

2. Whether the reassessment was based on a "change of opinion":
The Court emphasized that the original assessments for both years had specifically examined the royalty expenses. For the assessment year 2000-01, the Assessing Officer had reviewed various details, including the royalty payments, during the original assessment proceedings. Similarly, for the assessment year 2001-02, the Assessing Officer had raised specific queries regarding the royalty payments, and the assessee had provided detailed responses and a copy of the technical collaboration agreement. The Court concluded that the reassessment was indeed based on a change of opinion, as the same issue had been previously examined and accepted by the Assessing Officer during the original assessments.

3. Whether there was a failure on the part of the assessee to fully and truly disclose material facts:
The Court found that the assessee had fully disclosed all material facts related to the royalty payments in both assessment years. The royalty expenses were clearly shown in the profit and loss account, and detailed information, including TDS certificates and the technical collaboration agreement, had been provided to the Assessing Officer. The Court held that there was no failure or omission on the part of the assessee to disclose material facts. The Court also noted that the issue of royalty payments had been settled in favor of the assessee in previous assessment years, and the Revenue had accepted the Tribunal's decision that the royalty payments were revenue in nature.

Conclusion:
The High Court dismissed the Revenue's appeals, affirming the Tribunal's decision to strike down the reassessment proceedings. The Court held that the reassessment was based on a change of opinion, and there was no failure on the part of the assessee to disclose material facts. The Court cited the Supreme Court's observations in CIT vs. Kelvinator of India Ltd., emphasizing that reassessment should not be used as a tool for review and must be based on tangible material indicating escapement of income. The appeals were dismissed with no costs.