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TMI Blog2010 (5) TMI 645X X X X Extracts X X X X X X X X Extracts X X X X ..... geable to tax had escaped assessment by reason of the allowance of the expenses, he cannot issue notice u/s 148, even though the notice has been issued on 7-10-2002, which is within the period of four years from the end of the AY 1998-99. Therefore, initiation of reassessment proceedings u/s 147 was void ab initio - Decided in favor of assessee. - 8880 (MUM.) OF 2004 - - - Dated:- 7-5-2010 - R.V. EASWAR, D. MANMOHAN, K.C. SINGHAL, D.K. SRIVASTAVA AND RAJENDRA SINGH, JJ. S.K. Pahwa for the Appellant. Deepak Tralshawala for the Respondent. ORDER K.C. Singhal, Judicial Member. The main issue arising in this appeal relates to the validity of reassessment proceedings initiated by issue of notice under section 148 of the Income-tax Act, 1961 (the Act). 2. The facts relevant for disposal for this ground are these. The assessee filed its return of income on 30-11-1998 declaring total loss of Rs. 4,52,68,433 pertaining to the year under consideration. The assessment under section 143(3) of the Act was completed on 12-1-2001 at assessed loss of Rs. 4,38,51,970. Subsequently, the audit party noticed that: the assessee had capitalized the sum of Rs. 4,82,35,771, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on initial technology is capital in nature. Moreover, the assets acquired by the assessee which is intended to give long-term benefit and are of enduring nature are purely in the nature of capital assets." 3. The assessee challenged reopening of the assessment on the ground that no new facts had been brought on record and therefore, assessment could not be reopened merely on the basis of change of opinion. The Assessing Officer rejected the contention of the assessee by observing that the assessee company had taken double benefit by claiming depreciation after capitalizing the expenditure in the books of account as well as by claiming the same as revenue expenditure in the computation of income. Thus, there was an under assessment on the basis of which valid proceedings were initiated under section 148 of the Act. Reassessment was completed vide order dated 26-3-2004 by determining the total income at Rs. 38,68,550. 4. The matter was carried on appeal before the CIT(A) before whom it was contended that finding of the Assessing Officer that assessee had taken double benefit by claiming depreciation as well as deduction on account of Revenue expenses was not correct. It was sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, it cannot be said that the assessee had claimed any depreciation on the cost of vision software. Therefore, the question of claiming double deduction does not arise. In fact, the audit party as well as Assessing Officer had proceeded on assumption of incorrect facts and consequently, the reassessment proceedings could not be initiated on this ground. 6. Coming to the second ground for re-opening of the assessment, we find that necessary enquiry was made by the Assessing Officer while making assessment under section 143(3). The material placed before us shows that Assessing Officer had issued a questionnaire in the course of the assessment proceedings vide letter dated 26-9-2000. Question No. 12 stated as under :- 12. You have claimed expenses towards Vision Software Revenue expenses at Rs. 4,82,35,771. Please furnish the details of these expenses with complete addresses of the party to whom expenses of Rs. 1 lakh or more given with their confirmation. Please also justify your claim as business expense. The assessee vide letter dated 19-10-2000 replied as under :- "12. Expenses on Vision Software : Company has internally developed a software package known as "Visio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted equity shares of the said value in the assessment year 1969-70. This amount was claimed as revenue expenditure by the assessee. The question arose whether such expenditure could be allowed as Revenue expenditure. The Hon'ble Supreme Court held that a sum of Rs. 2,80,000 could never be treated as expenditure much less an expenditure laid out wholly and exclusively for the purposes of the business of the assessee. The said decision cannot be applied to the facts of the present case. In that case the payment was made in kind in respect of technical know-how contributed towards its capital prior to the commencement of the business and same was held not to be an expenditure. In the present case, the expenditure has been incurred by the assessee and that too in the course of the existing business. The issue whether expenses on acquisition of software is a revenue expenditure or capital expenditure has always been a subject-matter of debate which is also apparent from the fact that such issue was referred to the Special Bench in the case of Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112 (Delhi). Therefore, the decision of the Supreme Court referred to in the reasons recorded do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e books of account was certified by the Board of Directors and statutory auditors of the assessee-company. The Assessing Officer completely overlooked all the aforesaid facts while completing the original assessment under section 143(3) on 12-1-2001. The record is silent as to how the Assessing Officer had considered or dealt with the issue after issuing the questionnaire and receiving the reply from the assessee. It is thus a case where the Assessing Officer had plainly overlooked the relevant aspects of the case and thereby a very important issue involving substantial revenue implications escaped his attention while completing the assessment. The fact that he overlooked the issue is evident on bare perusal of the original assessment order in which there is absolutely no discussion or observation in this behalf though the said assessment was completed after the so-called scrutiny under section 143(3). It is thus a case where the Assessing Officer completely overlooked the relevant aspects of the case while finalizing the assessment. (iii) After the said assessment was completed under section 143(3), the Assessing Officer noticed, upon receipt of the Local Audit Report submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1999] 236 ITR 832 (Guj.) that the words "reason to believe" cannot mean that the Assessing Officer should have finally ascertained the facts by legal evidence and also that the conclusion of the Assessing Officer that it constitutes sufficient reason cannot be overridden unless the ground or material on which his belief is based is found to be so irrational as not to be worthy of being called a reason by any honest man. In IPCA Laboratories Ltd. v. Gajanand Meena, Dy. CIT [2001] 251 ITR 420 (Bom.), the Hon'ble jurisdictional High Court has upheld the action of the Assessing Officer in assuming jurisdiction under the main provisions of section 147 when he reopened an assessment completed under section 143(3) and observed that the expression "reason to believe" refers to the belief which prompts the Assessing Officer to apply section 147 to a particular case and that the belief must be of an honest and reasonable person based on reasonable grounds and not on mere suspicion and further that the reasons for the belief should have rational connection with the formation of belief. The judgment in Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not the proviso." 6. It is a matter of record that the impugned notice was issued within four years from the end of the assessment year under appeal. This issue is quite relevant as the validity of a re-assessment notice issued within four years from the end of the relevant assessment year has to be tested with reference to the conditions laid down in the main provisions of section 147 and not with reference to the conditions laid down under the proviso to section 146. Omission to notice this aspect of the matter may lead to importing the conditions stipulated in the proviso to section 147 in the cases falling under the main provisions of section 147. It is for this reason that this aspect is being highlighted here. 7. Since the impugned notice was issued within four years, its validity has got to be tested, in terms of the decision in Rajesh Jhaveri Stock Brokers (P.) Ltd.'s case (supra), with reference to only one condition, i.e., whether the reasons recorded by the Assessing Officer while issuing the impugned notice are based on relevant materials on which a reasonable person could have formed the requisite belief. The reason given by the Assessing Officer for formation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law. The belief formed by the Assessing Officer on the basis of assessee's own books of account is on the face of it based on relevant materials. His further observation in the reasons recorded that the software developed by the assessee was of enduring nature intended to give long-term benefit to the assessee is also based on the entries made in the books of account maintained by the assessee himself in conformity with the Accounting Standards and the provisions of law which undoubtedly are relevant materials. Treatment given to a transaction or expenditure by the assessee in its books of account the correctness of which is also certified by experts like Chartered Accountants/statutory auditors is a relevant piece of evidence. Formation of belief based on the audited books of account of the assessee and the audit report of the statutory auditors cannot be said to be irrelevant or unreasonable for initiating the action under the main provisions of section 147. On the face of it, such reasons are prima facie relevant and legally tenable and therefore provide a reasonable basis for assuming jurisdiction under section 147. It may further be mentioned that it is not the case either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer for reopening the assessment are based on specific and relevant materials suggesting prima facie that the income chargeable to tax had escaped assessment. The authorities referred to above including the decision of this Tribunal squarely cover the issue against the assessee. Hence the order of the CIT(A) invalidating the initiation of proceedings under section 147 deserves to be vacated and is accordingly vacated. 12. The learned CIT(A) has not quashed the impugned notice on the ground that the ingredients of the main provisions of section 147 are not satisfied in the present case. He has quashed the impugned notice on altogether a different ground. According to the learned CIT(A), the Assessing Officer had issued a questionnaire in response to which the assessee had submitted a reply and hence the Assessing Officer would be presumed to have considered and decided the issue and hence the initiation of proceedings was based on change of opinion. The learned CIT(A) first holds the view that the Assessing Officer would be presumed to have taken a view to allow the claim of the assessee because relevant details were furnished by the assessee before him and therea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce may be made to section 114 of the Evidence Act. According to it, the Court may presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public and private business, in their relation to the facts of the particular case. Illustration "e" to the aforesaid section provides that the Court may presume "that judicial and official acts have been regularly performed." Turning to the present case, what can be presumed in terms of section 114 (illustration "e") is that the assessment proceedings have been regularly conducted and nothing else. Illustration "e" does not create any presumption of fact that the Assessing Officer has taken a view when, in fact, he has not taken a view, only for the reason that relevant details were furnished by the assessee. After careful consideration of this issue, the Hon'ble Delhi High Court has held in Consolidated Photo Finvest Ltd. v. Asstt. CIT [2006] 281 ITR 394/151 Taxman 41 : "The argument that the proposed reopening of assessment was based only upon a change of opinion has not impressed us. The assessment order did not admittedly address itself to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y inadvertence or oversight or lack of due diligence on his part, to take the matter to logical conclusion and hence the learned CIT(A) was not right in raising the presumption that the Assessing Officer had considered all the possible aspects of the controversy and also taken a view in favour of the assessee. 14. It is well-recognized by the Legislature that the income chargeable to tax can escape assessment on account of acts of omissions and commissions on the part of the Assessing Officer as also on account of the acts of omissions and commissions on the part of the assessee. It is also recognized that to err is human and that the Assessing Officers, like any other public functionary, may also err in making the assessment. The legislative policy to collect the legitimate tax due to the public exchequer notwithstanding that the tax has escaped assessment as a result of some acts of omission or commission or error or oversight on the part of the Assessing Officer is sought to be achieved through various statutory measures like rectification of mistakes (section 154), revision of orders prejudicial to the interest of the Revenue (section 263) and income escaping assessments (sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed by this Tribunal in Amit Estate Organizer in these words: "Power to reassess can now be exercised even after assessee had disclosed fully and truly, all relevant facts". Submissions that an assessee had made full and true disclosure of facts before the Assessing Officer or that the facts were already placed on record by the assessee in response to a questionnaire or otherwise or that the Assessing Officer ought to have or should be presumed to have considered them are irrelevant considerations in the cases falling under the main provisions of section 147. The Assessing Officer has to satisfy only one condition in terms of the law declared by the Hon'ble Supreme Court in Rajesh Jhaveri Stock Brokers (P.) Ltd.'s case (supra). In Amit Estate Organiser's case (supra), this Tribunal has held: "Reasons for reopening may be the result of Assessing Officer's own investigation and also might come from any outside source." 15. In order to constitute change of opinion, an opinion must exist. But then what does the term "opinion" signify? The term "opinion" conveys different meaning in different contexts. However, such meanings do not serve the purpose in hand. The purpose here is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in law that an opinion has been formed by a public functionary either in favour of or against the assessee. Absence of expression of opinion means that no opinion exists. Absence or non-expression of opinion cannot be construed as existence of opinion. In the absence of expression of opinion, it cannot be presumed that an opinion has been formed. There can be no formation of opinion in cases where the Assessing Officer had initiated the process of inquiry but overlooked the same subsequently or omitted to take it to logical conclusion or omitted to consider and adjudicate upon the same by applying his mind. 16. Assuming that the Assessing Officer has expressed his opinion on a given issue in his assessment order in a case, can the mere expression of that opinion operate as a bar to the initiation of proceedings under section (sic) test the validity of the proposition as to whether mere expression of opinion will operate as a bar to the initiation of proceedings under the main provisions of section 147, three examples (they are only illustrative) deserve to be considered for the purpose: (i) While framing an assessment, an Assessing Officer takes a conscious view which is direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd.'s case (supra) and this Tribunal in Amit Estate Organiser's case (supra). Once the Assessing Officer has recorded the reasons in conformity with the principles laid down in the aforesaid judgment, his action has to be confirmed. It therefore follows that non-expression of opinion or mere expression of opinion, which is inconsistent either with the facts on record or with the law; in the assessment order does not operate as a bar in assuming jurisdiction under the main provisions of section 147 so long as the conditions of the main provisions of section 147 are satisfied. 17. Another related and interesting issue that arises for consideration is whether an assessment completed under section 143(3) overlooking important aspects of the case can be reopened under the main provisions of section 147. In Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC), it has been held by a Bench of three Hon'ble Judges of the Supreme Court in the context of the provisions of section 34(1)(b) of the old Act of 1922 that "if the ITO erroneously fails to tax a part of assessable income, it is a case where the said part of the income has escaped assessment" . Thus the error on the part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as, prima facie, there could not be change of opinion in that factual scenario. Approving the aforesaid observations, the Delhi High Court has held in Consolidated Photo Firmest Ltd.'s case (supra) that it is trite that a matter in issue can be validly determined only upon application of mind by the authority determining the same and the application of mind, in turn, is best demonstrated by disclosure of mind. The Hon'ble High Court has further held that where the order passed by a statutory authority is silent as to the reasons for the conclusion it has drawn, it can well be said that the authority has not applied its mind to the issue before it nor formed any opinion. 19. If the Assessing Officer overlooks to consider some aspect of the matter in the course of assessment proceedings and thereby does not express any opinion in the assessment order, can it be said that he has formed an opinion so as to presume that he has decided the issue in favour of the assessee and therefore the action initiated under the main provisions of section 147 would be hit on the ground that the initiation is bad on account of change of opinion? This is the precise issue in the present case. 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e diligence discerned by the Assessing Officer for the purpose of assessing a particular item of income chargeable to tax, it cannot be inferred that the Assessing Officer must necessarily have deliberated over or taken it out while ascertaining the taxable income or that he had formed any opinion in respect thereof. If looking back it appears to the Assessing Officer (albeit within four years of the end of the relevant assessment year) that a particular item even though reflected on the record was not subjected to assessment and was left out while working out the taxable income and the tax payable thereon, i.e., while making the final assessment order, that would enable him to initiate the proceedings irrespective of the question of non-disclosure of material facts by the assessee .. ." 21. The judgment in IPCA Laboratories Ltd.'s case (supra) also squarely covers the issue in hand against the assessee. The relevance of this judgment lies in the fact that it has been rendered by the Hon'ble jurisdictional High Court and therefore there is no discretion left with the Courts and Tribunals under the jurisdiction of the Hon'ble Bombay High Court to ignore the same. This is more so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Foramer France's case (supra) and Kelvinator of India Ltd.'s case (supra) for the proposition that it is a settled legal position that the reassessment proceedings cannot be initiated on the basis of change of opinion. Perusal of the Order in Foramer France's case (supra) shows that no such proposition has been laid down by the Hon'ble Supreme Court in that Order. The whole Order reads: "We have heard learned counsel for the parties and considered the facts of the case. We see no reason to interfere with the decision of the High Court. Accordingly, the civil appeals are dismissed with costs." Thus it is an Order of the Hon'ble Supreme Court by which the Hon'ble Court has declined to interfere with the decision of the High Court and not the one by which it has declared the law within the meaning of Article 141 of the Constitution. Secondly, perusal of the judgment of the Hon'ble Allahabad High Court in Foramer v. CIT [2001] 247 ITR 436/119 Taxman 61 against which the matter was taken to the Hon'ble Supreme Court shows that the proceedings in that case were initiated after the expiry of four years from the end of the assessment year. The initiation of proceedings under the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven on the ground of change of opinion. It is in fact based on the Assessing Officer completing the original assessment overlooking important facts, namely, that the assessee-company itself had treated the impugned expenditure as capital in nature in its books and also provided depreciation thereon in the schedules forming part of the balance sheet and profit and loss account, the observations of the statutory auditors in this behalf in their audit report, the accounting standards and practices. for capitalizing the impugned expenditure, the legal position with regard to capitalization of expenditure incurred on acquiring initial technology, the fact that the impugned expenditure would give rise to the benefit of enduring nature and more importantly the question whether the impugned expenditure was in the nature of capital expenditure or revenue expenditure. There is nothing in the "questionnaire" issued by the Assessing Officer to suggest that the Assessing Officer completing the original assessment had either enquired into or examined the aforesaid aspects of the case and expressed any opinion in that behalf in the assessment order. The assessee had indeed in its reply submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal, for reference to the Third Member under the aforesaid section of the Act. "Whether, on the facts and in the circumstances of the case and in law, the initiation of re-assessment proceedings under section 147 of the Income-tax Act, 1961 was void ab initio as held by the Vice-President or is in accordance with law as held by the Accountant Member?" THIRD MEMBER ORDER R.V. Easwar, Senior Vice-President (As a Third Member). - This appeal has been referred to me by the Hon'ble President under section 255(4) of the Income-tax Act, 1961, on a difference of opinion between the learned Members who heard the appeal. 2. The facts have been stated in the orders of the learned Members and since there is no dispute about the same, I do not consider it necessary to repeat them over again. 3. Before I proceed to resolve the difference of opinion, I must refer to the fact that there was no agreement between the learned Members on the point of difference to be referred to the Third Member and taking note of this, the Hon'ble President has observed that the Third Member should frame the points of difference first after hearing both the parties and thereafter the difference should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1989 ([1990] 182 ITR (St.) 1, at page 29), which also recognized that in order to allay the fears of the taxpayers that the proposed omission of the words "reason to believe" from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion, it was thought fit to reintroduce the expression "reason to believe" in the place of the words "for reasons to be recorded by him in writing, is of the opinion". Thus the Supreme Court noticed that the words "reason to believe" which were proposed to be omitted from section 147 were reintroduced to prevent arbitrary powers being exercised by the Assessing Officer in reopening the assessments. 5. The aforesaid ruling of the Supreme Court applies to the present case in full force. In the present case, as noted by the Hon'ble Vice President in paragraph 6 of his order, the Assessing Officer has raised a specific query regarding the allowability of the Vision Software expenses as revenue in nature and had specifically asked the assessee to justify the claim. The assessee wrote a letter to the Assessing Officer giving the justification and the relevant facts. Though there is no specific refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d an opinion about the allowability of the Vision Software expenses as revenue expenditure while completing the assessment under section 143(3) and there was no tangible material available to the Assessing Officer after the completion of the assessment to enable him to form the belief that income chargeable to tax had escaped assessment by reason of the allowance of the expenditure. 6. The learned counsel for the assessee also drew my attention to the judgment of the Bombay High Court in the case of Rallis India Ltd. v. Asstt. CIT [2010] 190 Taxman 1, in which, in similar circumstances, [i.e., reopening the assessment within four years from the end of the assessment year, the original assessment having been completed under section 143(3)] it was held, following the judgment of the Supreme Court in Kelvinator of India Ltd.'s case (supra), that it was a case of mere change of opinion and in the absence of any tangible material the original assessment in which deduction under section 36(1)(vii) was allowed in respect of bad debts, cannot be reopened under section 148 of the Act. The notice of reopening was accordingly quashed. This judgment also applies squarely to the present case. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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