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TMI Blog2014 (5) TMI 887X X X X Extracts X X X X X X X X Extracts X X X X ..... the reopening of assessment was based merely on change of opinion is correct – Decided against Revenue. Deletion of addition on capitalizing of expenses – Development of new product – Held that:-Following Radhasoami Satsang Vs. CIT [1991 (11) TMI 2 - SUPREME Court] - the treatment given to a particular item of the expenditure in books of account should not by itself be taken as conclusive evidence for treating the expenditure as capital or revenue expenditure - The law empowers the AO to assess the income of the assessee according to law and determine the tax payable - he cannot assess an assessee on an amount, which is not taxable in law, even if the same was shown by an assessee - There neither are any estoppels by conduct against law nor is there any waiver of the legal right as much as the legal liability to the assessed otherwise than according to the mandate of the law - CIT(A) has correctly concluded that the expenses would reveal that the expenses incurred by the assessee in both the Years is such, which will not create any capital asset in the hand of the assessee- the expenses cannot give any advantage of enduring nature in the capital field – thus, there was no infi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d u/s 139(1) of the Act on 29.10.2004 reflecting a loss of Rs. 1,73,05,130/-. The same was assessed at a reduced loss of Rs. 1,71,44,330/- vide order u/s 143(3) dated 28.09.2005. Subsequently, a notice u/s 148 was issued in this case on 31.01.2008. In response to the said notice vide letter dated 26.08.2008 the assessee has filed a return depicting loss of Rs. 1, 71,44,227/- i.e. at which the loss was assessed vide order u/s 143(3). Vide letter dated 26.03.2008, the assessee raised objections regarding initiation of reassessment proceedings in this case. The said objection was rejected by the Assessing Officer vide order dated 10.10.2008 and the Assessing Officer proceeded to reassess the assessee. The reason stated was that since the assessee had wrongly claimed deduction of Rs. 34,88,584/- on account of developing new products for its computation of income, even though, the assessee in its own account has not claimed the said expenditure as revenue and reproduced the note 8 to Part-B of Schedule 15(Notes to the accounts statement of significant accounting policies): Expenses on developing new products includes expenditure on material cost, foreign travel, salary, wages ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Assessing Officer has to reassess any income chargeable to tax which has escaped assessment for an assessment year only if he has reason to believe of escapement of such income. According to the ld AR reopening of assessment proceedings of a previous Assessment Year can take place only (a) after the assessing officer has satisfied the assessee that there are clinching evidence and materials which has come to his notice now; and that non-disclosure of the same at the time of assessment proceedings resulted in under assessment of income and (b) not withstanding that there has been an omission or failure on the part of the assessee, and he (Assessing Officer) is in possession of an information with which he has reason to believe that income chargeable to tax has escaped assessment. Therefore according to the ld AR in the present case there was no new tangible material before the Assessing Officer to reopen the case and the material that came to the notice of the Assessing Officer was merely an inference based on the accounting policy read from the note to the accounts as stated in the annual report furnished by the assessee. It was submitted that the issue of deferred revenue expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was required to be capitalized as they provide enduring benefits to the assessee. A perusal of the notice issued u/s 147 of the Act on 31.01.2008 reveals I have reason to believe your income chargeable to tax in Assessment Year 2004-05 has escaped assessment within the meaning of section 147 of the Act ; and in the reasons given for reopening of the case it has been recorded by the Assessing Officer that it is seen from records that assessee had claimed and was allowed deduction of Rs. 34.89 lakhs on account of developing of new products in computation of taxable income/ loss. As expenses incurred on developing of new products gave an advantage of enduring benefits to the assessee, it was required to be capitalized. The expenditure of Rs. 34.89 lakhs was capital expenditure and was liable to be disallowed/added back. Therefore, I have reasons to believe that income of Rs. 34.89 lakhs has escaped assessment by way of over-assessment of loss. Neither from a perusal of the notice to re-open, nor in the reason to reopen, or in the impugned assessment order there is a whisper about any new material or information in the hands of the Assessing Officer, which could have been the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression has reason to believe' in place of the words for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same. For the afore-stated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs. 12. The reasons recorded by the Assessing Officer to re-open the assessment, disclose that the Assessing Officer reached the belief that there was escapement of income while going through the very same records of the assessee which were there before the predecessor Assessing Officer and there was no mention of any new material or any new information or any new facts which was not disclosed by the assessee emerged from the record and its is evident from the words of the Assessing Officer itself it is seen from the records and therefore it was nothing more than the difference of opinion in respect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 256 ITR 1, full bench of Hon ble Delhi High Court has unequivocally held that a mere change of opinion would not confer jurisdiction upon the Assessing Officer to reopen proceedings without any material or information and If the Assessing Officer was allowed to do so, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its wrong. It is a well settled law that the Assessing Officer cannot review its own orders. 13. The ld CIT(A) has clearly made a finding that the issue of deferred revenue expenses had cropped up in the regular assessment proceedings for the Assessment Year under consideration and the assessee company vide its letter dated 14.09.2005 had submitted a detailed explanation as per para 6 of the said reply and from the perusal of the said reply the ld CIT(A) has noted that this issue was not only raised in the year under consideration but also in the Assessment Year 2001-02 ; this issue was examined by the Assessing Officer and the claim of the appellant company was allowed. In this factual background, the ld CIT(A) held that the Assessing Officer could not have held that the issue of deferred revenue ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that since the assessee had wrongly claimed deduction of Rs. 34,88,584/- on account of developing new products for its computation of income. 17. For Assessment Year 2006-07, the assessee s case was picked up for scrutiny and disallowed the expenditure to the tune of Rs. 43,85,584/- incurred by the assessee for developing new products. 18. The ld DR relied upon the order of the Assessing Officer and submitted that the assessee in his own accounts has treated the said expenses incurred on research and development cost as capital expenses, therefore, the assessee company now cannot turn around and claim that the said expenses are revenue expenses while computing the income. Therefore, the Assessing Officer disallowed the said expenses and added the said capital expenses to the total income of the assessee. It was also pointed out by the ld DR that the said expenses incurred on research and development could not be allowed as revenue expenses and it required to be capitalized without any doubt, since enduring benefits accrue to the assessee by development of new products. On other hand the ld AR drew our attention to the return of income in which though the sum of Rs. 34,88,584/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribution, Exgratia, Good work reward, HRA, leave travel subsidy, office expenses, postage Telegram expenses, production incentive, production repair reward, repair maintenance, salary, skill allowance, special allowance, van expenses, wages, car expenses, consumable store, additional demand excise audit, insurance paid, job work, conveyance expense telephone expenses, gratuity paid, power Fuel, component coffee machine, first aid allowance etc. Thus a perusal of the expenses shows that a substantial part of the expenses has been incurred by the appellant company on day to day expenses relating to salary and wages, telephone, staff welfare, security, printing and stationary, payment of ESI PF, power and fuel and other routine expenses. Further, the remaining expenses are also relating to the purchase of raw material and small items of spare parts and tools etc. Therefore, in the absence of any specific instances of items of capital nature, the action of the Assessing Officer in treating the deferred revenue expenses as capital expenditure cannot be sustained merely because the assessee has in its books of account categorized the same as capital expenses. It is settled positi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequent period. Thus, there is noting to indicate that the concerned expenditure has to be of capital nature for the purpose of treating the same as deferred revenue expenditure. On the contrary, although the said expenditure results into a benefit which accrues to the assessee over a period exceeding the accounting year, such benefit does not accrue to the assessee in the capital field but the same accrues only in the revenue field. When any expenditure is treated as deferred revenue expenditure it presupposes that the concerned expenditure, creating benefit in the revenue filed, is a revenue expenditure but considering its enduring benefit as well as the fact that it does not result in the creation of any new asset or advantage of enduring in the capital field, the same is required to be distinctly from capital expenditure. It was, thus, clear that the authorities below misconstrued the term deferred revenue expenditure as capital expenditure on the basis of accounting treatment given by the assessee in its books of account and proceeded to draw an adverse interference without considering the nature of the impugned expenditure as regards allowability of the same under the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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