2015 (4) TMI 979 - HC - Income Tax

Reopening of assessment - non deduction of tds on payment credit to foreign companies, on account of software services - Held that - In the original assessment, full particulars with respect to Software License Fees by the assessee to the foreign companies was disclosed. Not only that the assessee claimed the same as revenue expenditure. The notice was issued under section 143(3) of the Act and the Assessing Officer also vide communication / notice dated 12/11/2010 called upon the assessee to furnish necessary documents which include the complete details of Software License Fees . The assessee was also directed to furnish relevant documentary evidences to establish and prove that Software License Fees is in nature of revenue. The assessee submitted complete details of Software License Fees and justified its claim that the Software License Fees is in the nature of revenue expenditure and not capital expenditure. Thus it cannot be said that the assessee did not disclose fully and truly all material facts necessary for the assessment with respect to Software License Fees paid to foreign companies and therefore, the income chargeable to tax has been escaped due to the failure on the part of the assessee to disclose fully and truly all material facts. Under the circumstances, the condition precedent for invoking powers under section 147 of the Income Tax Act to initiate reassessment proceedings beyond the period of 4 years are not at all satisfied. Once the case of the assessee is covered by the 1st proviso to section 147 of the Act, the reassessment proceedings beyond the period of 4 years from the end of the relevant assessment year would be without any jurisdiction and bad in law, if all material facts are furnished and there remained no omission or failure on the part of the assessee to disclose truly and fully all material facts. Thus the impugned reassessment proceedings of reopening assessment for the A.Y. 2007-2008 are hereby terminated. See Niko Resources Ltd. (2014 (9) TMI 892 - GUJARAT HIGH COURT) as well as Gujarat Lease Financing Limited (2013 (10) TMI 101 - GUJARAT HIGH COURT) - Decided in favaour of assessee.

Summary

Issues Involved:
1. Legality of the notice issued under section 148 of the Income Tax Act, 1961.
2. Validity of the reopening of assessment under section 147 of the Income Tax Act beyond four years.
3. Whether there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.

Detailed Analysis:

1. Legality of the Notice Issued Under Section 148 of the Income Tax Act, 1961:

The petitioner challenged the notice issued under section 148 dated 27/3/2014 for A.Y. 2007-2008, arguing that the reopening of the assessment was based on misconceived and baseless grounds. The petitioner contended that there was no failure on their part to disclose fully and truly all material facts necessary for the assessment. The petitioner had provided all details of the Software License Fees during the original assessment, and the same was scrutinized by the Assessing Officer.

2. Validity of the Reopening of Assessment Under Section 147 of the Income Tax Act Beyond Four Years:

The court noted that the initiation of reassessment proceedings was beyond the period of four years from the end of the relevant assessment year. According to the first proviso to section 147, reassessment after four years is permissible only if there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The court emphasized that if all material facts are furnished by the assessee and there is no omission or failure on their part, the initiation of reassessment proceedings beyond four years is not permissible and would be without jurisdiction.

3. Whether There Was a Failure on the Part of the Assessee to Disclose Fully and Truly All Material Facts Necessary for the Assessment:

The court examined the facts and found that during the original assessment, the assessee had disclosed full particulars regarding the Software License Fees paid to foreign companies. The Assessing Officer had issued a notice under section 143(3) and called upon the assessee to furnish necessary documents, including complete details of the Software License Fees. The assessee had justified its claim that the Software License Fees were in the nature of revenue expenditure and not capital expenditure. The court observed that the Assessing Officer had allowed the deductions claimed after scrutinizing the details provided by the assessee.

The court referred to the decisions in the cases of Niko Resources Ltd. and Gujarat Lease Financing Limited, which held that reassessment beyond four years is permissible only if there is a failure on the part of the assessee to disclose fully and truly all material facts. The court concluded that there was no such failure on the part of the assessee in this case. Therefore, the condition precedent for invoking powers under section 147 to initiate reassessment proceedings beyond four years was not satisfied.

Conclusion:

The court held that the impugned reassessment proceedings initiated beyond the period of four years were not permissible and could not be sustained. The impugned notice under section 148 for A.Y. 2007-2008 was quashed and set aside, and the reassessment proceedings were terminated. The court clarified that it had not expressed any opinion on the merits of whether the payment of Software License Fees to foreign companies was revenue expenditure or capital expenditure, and the question was kept open. The rule was made absolute, and there was no order as to costs.