2013 (1) TMI 160 - HC - Income Tax

Reopening of assessment - proceedings initiated after a period of four years - disallowance of the royalty paid as capital expenditure - assessment years 2002-03 and 2003-04 - Held that - The assessing authority cannot keep improving his case from time to time and that the reassessment proceedings have to stand or fall on the basis of what was stated in the reasons recorded u/s. 148(2) and nothing more. No failure to furnish full and true particulars relating to the royalty payments, including the failure to file the relevant agreements, has been alleged in the reasons recorded. If anything, the reasons are an admission that it was the assessing officer who did not draw the inference that the royalty payments were capital in nature. It was for him to draw the appropriate inference and not for the assessee to tell him what inference of fact or law should be drawn from the primary facts furnished. See Calcutta Discount Co. Ltd., (1960 (11) TMI 8 - SUPREME COURT) - thus the reassessment notices for the assessment years 2002-03 and 2003-04 are quashed . Reopening based on information received from Revenue Audit - Assessment year 2004-05 - within the period of four years - Held that - It is difficult to sustain the notice issued u/s. 148 as the audit objection is only an inference that the royalty payment resulted in a capital benefit, such an opinion expressed by the audit cannot constitute tangible material on the basis of which the assessment can be reopened. As decided in Indian Eastern and Newspaper Society v. CIT, (1979 (8) TMI 1 - SUPREME COURT) information as to correct legal position must come from a formal source or body which is competent to pronounce upon the issue and that revenue audit is not competent to pronounce on issues of law. The alleged non-deduction of tax from the royalty which would authorise the disallowance under section 40(a)(i) is a fact that is mentioned for the first time in the counter-affidavit and it does not find place in the reasons recorded. As noted earlier, it is impermissible to look into any record other than the reasons recorded to judge the validity of the reopening of the assessment. Further, the statement in the counter- affidavit that the facts relating to the past years disclosed that the petitioner was wholly dependent on the parent company for the technical inputs goes against the revenue, in the sense that it was always known to the revenue that the petitioner did not develop any technology of its own but was dependent on the technology from the parent company. Moreover, it is not for the petitioner to advise the assessing officer as to what inference he should draw as to nature of the expenditure whether it is revenue or capital in nature. thus the notice issued u/s. 148 for the AY 2004-05 is also without jurisdiction & be quashed - appeal in favour of assessee.

Issues Involved:

1. Reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961.
2. Jurisdictional pre-condition under the first proviso to Section 147.
3. Disclosure of material facts by the petitioner.
4. Validity of reasons recorded under Section 148(2).
5. Allegation of failure to furnish full and true particulars.
6. Presumption of application of mind by the assessing officer.
7. Tangible material required for reopening assessment.
8. Role of audit objections in reopening assessments.
9. Non-deduction of tax under Section 40(a)(i).

Detailed Analysis:

1. Reassessment Proceedings Initiated under Section 148 of the Income Tax Act, 1961:
Three writ petitions were filed by a company engaged in the export of software, manufacture of photocopiers, and trading in fax, paper, and toner, challenging reassessment proceedings initiated by notices under Section 148 of the Income Tax Act, 1961. Two petitions related to assessment years 2002-03 and 2003-04, while the third related to assessment year 2004-05.

2. Jurisdictional Pre-condition under the First Proviso to Section 147:
For assessment years 2002-03 and 2003-04, reassessment proceedings were initiated after four years from the end of the relevant assessment years. Under the first proviso to Section 147, notice to reopen an assessment beyond four years can only be issued if income has escaped assessment due to the failure of the assessee to file returns or furnish all material facts.

3. Disclosure of Material Facts by the Petitioner:
For assessment year 2002-03, the petitioner had disclosed royalty expenses in the profit and loss account and Schedule N. For assessment year 2003-04, royalty expenses were disclosed in Schedule-O, and specific queries were raised and answered regarding royalty payments. No failure to disclose material facts was alleged in the reasons recorded under Section 148(2).

4. Validity of Reasons Recorded under Section 148(2):
For assessment year 2002-03, the reasons recorded for reopening included the treatment of royalty as capital expenditure and the disallowance of provision for securitisation. For assessment year 2003-04, similar reasons were recorded. However, the ground relating to disallowance of provision for securitisation was dropped, leaving only the royalty issue. The court noted that the reasons recorded did not allege any failure to furnish full and true particulars.

5. Allegation of Failure to Furnish Full and True Particulars:
The court observed that the assessing officer cannot improve his case over time and that reassessment proceedings must stand or fall on the reasons recorded. No failure to furnish particulars was alleged in the recorded reasons, and the reasons indicated that it was the assessing officer's responsibility to draw the appropriate inference.

6. Presumption of Application of Mind by the Assessing Officer:
For assessment year 2004-05, the petitioner argued that once an assessment is completed under Section 143(3), the assessing officer is presumed to have applied his mind to all issues. Reopening an assessment requires tangible material indicating that income has escaped assessment, not merely a change of opinion.

7. Tangible Material Required for Reopening Assessment:
The court emphasized that reopening an assessment requires tangible material. The reasons recorded for assessment year 2004-05 did not refer to any tangible material, and the audit objection regarding the capital nature of royalty payments was deemed insufficient.

8. Role of Audit Objections in Reopening Assessments:
The court held that audit objections cannot constitute tangible material for reopening assessments. The Supreme Court in Indian Eastern and Newspaper Society v. CIT stated that revenue audit is not competent to pronounce on issues of law.

9. Non-deduction of Tax under Section 40(a)(i):
The allegation of non-deduction of tax from royalty payments, which would authorize disallowance under Section 40(a)(i), was mentioned for the first time in the counter-affidavit and not in the reasons recorded. The court reiterated that the validity of reopening must be judged based on the reasons recorded.

Conclusion:
The court quashed the reassessment notices and consequent proceedings for all three assessment years, ruling that the notices under Section 148 were without jurisdiction. The reassessment proceedings were deemed invalid due to the lack of tangible material and failure to meet jurisdictional pre-conditions. The writ petitions were allowed with no order as to costs.

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