2015 (5) TMI 189 - HC - Income Tax

Reopening of assessment - beyond the period of 4 years - Software License Fees paid to the foreign companies was in nature of Royalty and thus, Capital Expenditure and therefore, it attracts section 195 of the Income Tax Act and therefore payment made without withholding of tax at source - also the assessee had not fulfilled the conditions for eligibility of deduction u/s 10B & the deduction was not in order - Held that - It is required to be noted 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 28/7/2011 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. Only thereafter the Assessing Officer while framing the assessment, treated the payment of Software License Fees made to the Foreign Companies as revenue expenditure and allowed the deductions claimed and also accepted the claim of the assessee of deduction under section 10(B) of the Income Tax Act. 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 also with respect to deduction claimed under sec.10(B) of the Act, 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. See Niko Resources Ltd. Versus Assistant Director of Income Tax,(2014 (9) TMI 892 - GUJARAT HIGH COURT) as well as Gujarat Lease Financing Limited (2013 (10) TMI 101 - GUJARAT HIGH COURT) - impugned notice u/s 148 is hereby quashed - Decided in favour of assessee.

Issues Involved:
1. Validity of Reopening Assessment Proceedings under Section 147 of the Income Tax Act beyond four years.
2. Failure to disclose fully and truly all material facts necessary for assessment.
3. Nature of "Software License Fees" as revenue or capital expenditure.
4. Eligibility for deduction under Section 10(B) of the Income Tax Act.

Detailed Analysis:

1. Validity of Reopening Assessment Proceedings under Section 147 of the Income Tax Act beyond four years:
The petitioner challenged the reopening of the assessment for A.Y. 2008-2009 initiated under Section 147 of the Income Tax Act, asserting that it was beyond the period of four years. The court emphasized 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 necessary for assessment. The court noted that the original assessment was completed after scrutinizing all necessary details, including the "Software License Fees," and no new facts were brought to light that were not disclosed by the assessee.

2. Failure to disclose fully and truly all material facts necessary for assessment:
The petitioner argued that all material facts were disclosed during the original assessment, and there was no omission or failure on their part. The court observed that the petitioner had provided all necessary details regarding the "Software License Fees" and the claim under Section 10(B) during the original assessment. The court found that the conditions for reopening the assessment beyond four years were not satisfied as there was no failure on the part of the assessee to disclose material facts.

3. Nature of "Software License Fees" as revenue or capital expenditure:
The revenue contended that the "Software License Fees" paid to foreign companies were in the nature of "Royalty" and thus should be considered capital expenditure, attracting Section 195 of the Income Tax Act, which requires TDS deduction. The court noted that during the original assessment, the nature of the "Software License Fees" was scrutinized, and it was accepted as revenue expenditure. The court held that reopening the assessment on the same material, merely to take a different view, was not justified.

4. Eligibility for deduction under Section 10(B) of the Income Tax Act:
The revenue argued that the petitioner did not obtain the necessary approval from the Board for the units to qualify for deduction under Section 10(B). The petitioner countered that they had obtained approval from relevant authorities, such as the Development Commissioner and the Director of the Software Technology Park, which sufficed for the deduction. The court found that the petitioner had disclosed all relevant approvals during the original assessment, and there was no failure to disclose material facts.

Conclusion:
The court quashed the impugned notice under Section 148 of the Income Tax Act for A.Y. 2008-2009 and terminated the reassessment proceedings, stating that the conditions for reopening the assessment beyond four years were not met. The court clarified that it did not express any opinion on the merits of whether the "Software License Fees" should be considered revenue or capital expenditure and left that question open. The rule was made absolute, and no order as to costs was issued.

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