2015 (10) TMI 952 - HC - Income Tax

Validity of reopening of the assessment - disallowance of royalty as revenue expenditure - decision in Southern Switchgears Ltd. v. CIT 1997 (12) TMI 105 - SUPREME Court which was rendered by the Supreme Court several years earlier on 11th December 1997 was not noticed by the AO at the time of finalization of assessment at the first instance on 31st January 2005 under Section 143(3) - Held that - In the present case, there was no failure on the part of the Assessee to disclose the material particulars with the return originally filed. On the contrary, the AO himself replied to the audit objection pointing out that royalty was allowed to be claimed as revenue expenditure by the Assessee for the years earlier to AY 2002-03. A copy of the agreement under which royalty was being paid was provided to the Revenue. In light of the legal position after the amendment to Section 147 of the Act, as explained in CIT v. Kelvinator of India Ltd. (2010 (1) TMI 11 - SUPREME COURT OF INDIA), the Court is of the view that, in a case where the assessment is sought to be reopened in 2009, four years after it was originally made, i.e. 2005, the mere fact that there was a judgment of the Supreme Court of 1997 which was not noticed by the AO when he framed the original assessment cannot per se constitute the only material on the basis of which the assessment could have been reopened. When on the same material, four years after the assessment year for which the original assessment is finalised, the AO seeks to reopen the assessment on the basis of a judicial precedent delivered more than eight years earlier, it would be a case of mere change of opinion , something clearly held impermissible by CIT v. Kelvinator of India Ltd. (supra), The threshold requirement of that the AO should, on the basis of some tangible material, conclude that there was escapement of income on account of the Assessee failing to disclose material particulars, is not fulfilled in the present case. Consequently, the reopening of the assessment was, in the facts of the present case, not justified. - Decided in favour of assessee.

Summary

Issues:
Reopening of assessment under Section 147 of the Income Tax Act, 1961 based on the treatment of expenditure as capital or revenue nature.

Analysis:

1. Reopening of Assessment:
The case involved an appeal by the Assessee against the order of the Income Tax Appellate Tribunal (ITAT) upholding the reopening of assessment by the Assessing Officer under Section 147 of the Income Tax Act, 1961. The Assessee's return of income for the Assessment Year 2002-03 was selected for scrutiny, and an order was passed assessing the income. Subsequently, a notice was issued seeking explanation on the treatment of an expenditure under "Royalty & Cess" as capital or revenue nature. The Assessing Officer penned reasons for reopening the assessment more than four years later, citing a Supreme Court decision that such expenditure should be treated as capital. The Assessee objected to the reopening, but the AO proceeded to add the amount to the income and initiate penalty proceedings.

2. Legal Precedents and Interpretation:
The Commissioner of Income Tax (Appeals) allowed the Assessee's appeal, but the ITAT allowed the Revenue's appeal. The Revenue relied on the Supreme Court decision in ALA Firm v. CIT to justify the reopening based on overlooking a binding precedent. However, the court distinguished the present case from ALA Firm, emphasizing the timing of the reopening and the amendments to Section 147 post-1989. The court highlighted the requirement of tangible material for reopening under the amended Section 147 and cited the Kelvinator case emphasizing the need for a reason to believe income escapement.

3. Failure to Disclose Material Facts:
The court analyzed the facts and concluded that there was no failure on the part of the Assessee to disclose material particulars initially. The Assessee had provided information on royalty payments and agreements, and the AO had replied to audit objections supporting the treatment of royalty as revenue expenditure. The sole basis for reopening was the AO's failure to consider a Supreme Court decision from 1997 during the original assessment, which the court deemed insufficient for reopening after four years.

4. Judicial Interpretation and Conclusion:
In light of legal precedents and the amended Section 147, the court held that the mere oversight of a past judicial precedent by the AO did not justify the reopening of assessment after a significant lapse of time. Citing the impermissibility of a mere change of opinion, the court ruled in favor of the Assessee, setting aside the ITAT's order and allowing the appeal. The court emphasized the need for tangible material to establish income escapement for a valid reopening of assessment.

Conclusion:
The court's decision favored the Assessee, highlighting the importance of tangible material and the prohibition against reopening assessments based solely on a change of opinion. The judgment underscored the significance of disclosing material facts and the requirement for a valid reason to believe income escapement for reopening assessments under Section 147 of the Income Tax Act, 1961.