2018 (1) TMI 709 - AT - Income Tax

Validity of reopening of assessment - eligible reasons to believe - non specific reasons - Held that - In the absence of proper recording of reasons that income chargeable to tax has escaped assessment by the reasons of failure on the part of the assessee to disclose fully and truly all necessary facts relevant to the assessment, reopening of assessment after 4 years is not a valid reopening and on the basis of the assessment framed consequent to the bad reopening, the assessment can be quashed. In the instant case, since the AO has not recorded the specific satisfaction that income chargeable to tax has escaped the assessment on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, the reopening is invalid. Therefore, the assessment framed consequent to the invalid reopening deserves to be quashed. - Decided in favour of assessee. Eligibility to claim u/s 10B - Held that - The assessee is merely a (developer) or a collaborator for the Cornelius or its group and it has undertaken the services required by them for which the assesse was compensated and hence it s business can be considered as a Research Collaborator rendering technical services which is not within the scope of s. 10B . The Cornelius or its group own the entire property including the assessee s output or it s so called product etc as defined in the Foreground Information, IPR etc under clause 1.1. Thus, the assessee owns nothing which could be exported. When the assessee has not established that its output is an independent product or article or thing or computer software, it is owner of it, it has exported them and earned the impugned income, the questions whether it manufactured or produced articles or things or computer software, whether it exported them etc as required u/s10B is nowhere in the realm and hence its claim of deduction u/s 10B is not allowable - Decided against assessee.

Summary

Issues Involved:
1. Validity of reopening the assessment beyond the time limit prescribed under Section 147 of the IT Act.
2. Justification for disallowing the deduction claimed under Section 10B of the IT Act.
3. Levy of interest under Section 234B and Section 234D of the IT Act.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment Beyond Time Limit Prescribed Under Section 147 of the IT Act:

The assessee challenged the reopening of the assessment for the assessment year 2006-07 on the grounds that it was done beyond the time limit prescribed under Section 147 of the IT Act. The assessee argued that the reopening was invalid as it was initiated after four years without establishing that income had escaped assessment due to the assessee's failure to disclose fully and truly all material facts necessary for the assessment. The Tribunal found that the assessment was reopened on 22.03.2013, which was beyond the permissible period of four years from the end of the relevant assessment year (2005-06). The Tribunal referred to the reasons recorded by the Assessing Officer (AO) and concluded that the AO did not specifically state that the income had escaped assessment due to the assessee's failure to disclose all material facts. The Tribunal cited various judicial precedents, including the case of M/s. DHFL Vysya Housing Finance Ltd., to support its decision that the reopening was invalid. Consequently, the assessment framed as a result of the invalid reopening was quashed.

2. Justification for Disallowing the Deduction Claimed Under Section 10B of the IT Act:

The assessee contested the disallowance of the deduction claimed under Section 10B for the assessment years 2006-07 and 2011-12. The CIT(A) upheld the disallowance based on the directions issued by the Addl. CIT for the assessment year 2009-10, which stated that the assessee's activities did not qualify as the export of computer software or IT-enabled services. The Tribunal examined the nature of the assessee's activities and found that the assessee was engaged in research and development in the field of refrigeration engineering, mechanical engineering, or electrical engineering, and not in the export of computer software or IT-enabled services. The Tribunal referred to the order in the case of IMI R & D Centre India P. Ltd., where it was established that for a claim under Section 10B, the assessee must prove that it manufactured or produced articles, things, or computer software and exported them. The Tribunal concluded that the assessee's activities did not meet these criteria and upheld the disallowance of the deduction under Section 10B.

3. Levy of Interest Under Section 234B and Section 234D of the IT Act:

The assessee also challenged the levy of interest under Section 234B and Section 234D of the IT Act. However, since the Tribunal quashed the assessment for the assessment year 2006-07, the issue of interest levy for that year became moot. For the assessment year 2011-12, the Tribunal upheld the disallowance of the deduction under Section 10B, which consequently justified the levy of interest under Section 234B and Section 234D.

Conclusion:

The appeal for the assessment year 2006-07 was allowed, quashing the assessment due to invalid reopening. The appeal for the assessment year 2011-12 was dismissed, upholding the disallowance of the deduction under Section 10B and the levy of interest under Section 234B and Section 234D.