2013 (1) TMI 679 - HC - Income Tax

Reopening of assessment - Incorrect allowance of deduction in respect of royalty received from foreign enterprise, deduction in respect of export profits,profit and gains from newly established undertakings, profit and gains from newly established industrial undertakings & non-business expenditure - Held that - Insofar as all the purported reasons other than the reason pertaining to club expenses are concerned, specific queries had been raised and the AO had considered the material placed by the petitioner before him as claim in the return supported by a relevant certificates has been submitted by assessee. As regards club expenses, Mr Maratha appearing on behalf of the respondents states that since no specific query had been raised, Explanation 1 would get triggered. But no agreement with this submission this is so because the club expenses were specifically mentioned at serial No. 17(d) of the tax audit report in Form No. 3CD which was annexed along with the return. This was a clear statutory disclosure on the part of the assessee with regard to the claim of club expenditure. It was not a piece of evidence which was hidden in some books of accounts from which the Assessing Officer could have possibly, with due diligence, discovered the same. On the contrary, this was material which was placed before the Assessing Officer along with the return which the Assessing Officer was duty bound to go through before completing the assessment. Clearly this does not fall in the category of material which is referred to in Explanation 1 to Section 147 of the said Act. Thus this is clearly not a case of failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment. This is of material significance because the notice under Section 148 has been issued after expiry of four years from the end of the relevant assessment year. Therefore, the notice is time barred. Apart from this,it amounts to a mere change of opinion - in favour of assessee.

Issues Involved:

1. Validity of notice under Section 148 of the Income Tax Act, 1961.
2. Incorrect allowance of deduction in respect of royalty received from foreign enterprises.
3. Incorrect allowance of deduction in respect of export profits.
4. Incorrect allowance of deduction in respect of profit and gains from newly established undertakings.
5. Incorrect allowance of non-business expenditure.
6. Failure to fully and truly disclose all material facts necessary for assessment.
7. Change of opinion.

Detailed Analysis:

1. Validity of Notice under Section 148:

The petitioner challenged the notice dated 29.03.2010 issued under Section 148 of the Income Tax Act, 1961, for reopening the assessment for the year 2003-04. The assessment had been previously framed under Section 143(3) by an order dated 28.03.2004. The petitioner argued that the notice was invalid as it was issued beyond the period of four years and there was no failure on the part of the petitioner to fully and truly disclose all material facts necessary for the assessment. The court found that the notice was time-barred and amounted to a mere change of opinion, thus quashing the notice and all proceedings pursuant thereto.

2. Incorrect Allowance of Deduction in Respect of Royalty Received from Foreign Enterprises:

The purported reason for reopening the assessment was the incorrect allowance of deduction under Section 80-O on gross receipts of Rs. 49,96,75,364 without deducting proportionate expenses, resulting in under-assessment of income by Rs. 7,29,52,603. The petitioner contended that all material facts were fully disclosed, including a specific claim in the return supported by a certificate in Form No. 10HA and a detailed reply to the Assessing Officer's query. The court agreed, noting that the issue was specifically considered by the Assessing Officer during the original assessment.

3. Incorrect Allowance of Deduction in Respect of Export Profits:

The reopening was also based on the incorrect allowance of deduction for export profits, where trade discounts and R&D expenses were not considered in the indirect cost. The petitioner argued that the claim was supported by the audit report and a detailed reply to a specific query from the Assessing Officer. The court found that the Assessing Officer had considered the issue during the original assessment, and the petitioner had fully disclosed all necessary material facts.

4. Incorrect Allowance of Deduction in Respect of Profit and Gains from Newly Established Undertakings:

The reopening included reasons related to the incorrect allowance of deductions under Section 80 IB, where the petitioner had apportioned only a percentage of R&D and head office expenses. The petitioner argued that these deductions were specifically claimed in the return and supported by the tax audit report and accounts. The court noted that specific queries had been raised and answered by the petitioner, and the Assessing Officer had completed the assessment after considering these details.

5. Incorrect Allowance of Non-Business Expenditure:

The reopening also cited the incorrect allowance of non-business expenditure, specifically the expenditure incurred on clubs. The petitioner pointed out that this expenditure was disclosed in the tax audit report and defended by the Assessing Officer in response to an audit memo. The court found that the petitioner had fully disclosed the expenditure, and the Assessing Officer had considered it during the original assessment.

6. Failure to Fully and Truly Disclose All Material Facts Necessary for Assessment:

The respondents argued that the petitioner failed to fully and truly disclose all material facts necessary for the assessment, particularly regarding club expenses. The court found that the petitioner had made a clear statutory disclosure of the club expenses in the tax audit report, which was annexed to the return. The court concluded that there was no failure on the part of the petitioner to disclose material facts.

7. Change of Opinion:

The petitioner argued that the reopening of the assessment was based on a mere change of opinion, as all the points raised in the purported reasons had been considered by the Assessing Officer during the original assessment. The court agreed, noting that the Assessing Officer had raised specific queries and received detailed replies from the petitioner before completing the assessment. The court concluded that the reopening amounted to a mere change of opinion, which is not permissible under the law.

Conclusion:

The court quashed the impugned notice dated 29.03.2010 and all proceedings pursuant thereto, allowing the writ petition with no order as to costs.

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