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TMI Blog2017 (7) TMI 967X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the motor vehicles taken on lease and showed the finance lease account payable as secured loan in its books of accounts. While the interest on the said amount was directly debited to the Profit and Loss Account and claimed as deduction in the computation of taxable income, the principal portion of the finance lease rent paid by the Assessee reduced the finance lease liability that was not debited to the Profit and Loss Account. As part of the accounting treatment, the depreciation was debited to the Profit and Loss account. For the purposes of tax treatment, however, the depreciation was in fact added back. The Assessee separately claimed the principal portion of the leased rent. The Assessee was guided by Circular No. 2 of 2001 issued by the Central Board of Direct Taxes (‘CBDT’) which provided that AS-19 would have no implication on the allowance of depreciation on the assets under the provisions of the Act. All of this was already explained in the original assessment proceedings and examined by the AO. A complete disclosure is made in the balance sheet. Note 5 to the accounts also explained this. In the later AY i.e., AY 2005-06, the AO again examined this issue and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llenges a notice dated 31st March, 2010 issued by the Deputy Commissioner of Income Tax, Circle 13(1) [hereafter the Assessing Officer ( AO )] under Section 147/148 of the Income Tax Act, 1961 ( Act ) seeking to re-open the assessment for Assessment Year ( AY ) 2003-2004. Background facts 2. The Assessee is a wholly-owned subsidiary of Oracle Systems Corporation, USA ( OSC ), formerly known as Oracle Corporation. The Assessee entered into an Agreement dated 28th May, 1993 known as the Software Duplication and Distribution License Agreement ( SDDLA ) for duplication and distribution of software. The SDDLA was valid for five years, which was renewable on a year-to-year basis. The last renewal relevant to the AY in question was on 1st June, 2002. The Assessee is also stated to be engaged in the activity of software development. 3. On 31st January, 2005, the Assessee filed its return declaring an income of ₹ 81,26,08,093. The Assessee inter alia claimed deduction under Section 80-IB and Section 10A of the Act. 4. The return was picked up for scrutiny and a notice under Section 143(2) of the Act was served upon the Assessee. Pursuant thereto, the Assessee rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue s appeal on the issue of eligibility of claim of tax holiday under Section 80-IA of the Act and other issues was dismissed by this Court by the order dated 1st September, 2009, which has been affirmed by the Supreme Court by dismissing the Revenue s SLP by the order dated 22nd October, 2010 in SLP(C) CC No. 15810/2010. The appeal of the Revenue on the issue of disallowance of part claim of royalty expenditure being ITA No. 987/2010 was dismissed by this Court on 30th March, 2011. Notice under Section 148 9. After more than four years from the end of the relevant AY i.e., 2003-04, which period ended on 31st March, 2008, the AO issued the impugned notice under Section 148 of the Act to the Assessee on 31st March, 2010 stating that he had reasons to believe that income had escaped assessment. A summary of the reasons for re-opening the assessment, as communicated to the Assessee by the AO were as under: i. Failure of the Assessee to add back cost of acquisition of software by the development division (as reported in para 17 (1) of the Tax Audit Report for the year ended 31st March, 2003) for the computation of total income for the AY in question. The proposed additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l expenditure debited to Profit and Loss Account in the revised return. (ii) In the counter-affidavit filed by the Revenue in the present case, this fact had been admitted and yet the Revenue wanted to verify these facts. There could not be a re-opening of assessment merely because certain facts had to be verified. It was plain that there was no failure by the Assessee to disclose material facts relating to the above items. (iii) As regards the second reason that a presumption should be drawn that a disallowable item has been claimed as a deduction since the notes to the computation of total income in the audit of accounts stated that the tax and accounting treatment differ, the accounting treatment was in fact explained in detail by the Assessee in the accounts itself. (iv) The issue concerned financial lease in which the lessee does not become the owner of the equipment. For accounting purposes, economic ownership is accepted. In terms of AS-19, which had to be followed, the payment made pursuant to the financial lease was divided between interest and principal on estimate basis. However, for the purposes of income tax, since the lessee is not the owner, whatever is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was examined extensively in the assessment proceedings. The basis of the royalty was 30% of the Indian published price, even though the sale might have been at a different price. (ix) This was a clear case of change of opinion by the AO. Even in the remand report dated 1st May, 2002, no adverse comments were made by the AO for the CIT(A) who by an order dated 18th November, 2002 accepted the Assessee s submission and restricted the observations on the ground that the activity of duplication did not amount to manufacture. The order of the CIT(A) was affirmed by the ITAT and by this Court in Oracle India ( P .) Ltd . v . Commissioner of Income Tax ( 2014 ) 264 CTR 144 ( Del ). The SLP against the said order was dismissed by the Supreme Court in CIT s . Oracle Software India Ltd . ( 2010 ) 320 ITR 546 ( SC ). (x) Reason No. 5 (i) given by the AO was that there was no evidence of Delhi Division of OIPL being registered as an industrial undertaking , it was pointed out that there was no such requirement in law. This Court has in Praveen Soni v . CIT ( 2011 ) 333 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions as stated in reasons 1 and 3 had in fact been made. According to her, this required verification and, therefore, the AO should be permitted to proceed with the assessment proceedings for this purpose. She placed reliance on the decisions in CIT v . Usha International Limited ( 2012 ) 348 ITR 485 ( Del ) , OPG Metals Finsec Ltd . v . CIT ( 2013 ) 358 ITR 144 ( Del ) and Indian Hume Pipe Co . Ltd . v . ACIT ( 2012 ) 348 ITR 439 ( Bom ) to urge that the mere production of the accounts would not relieve the Assessee of the responsibility of showing that the Assessee had made a full and true disclosure of all material facts necessary for the assessment in the first round of the assessment proceedings. Ms. Bansal maintained that under Explanation 1 to Section 147, the mere production of accounts would not necessarily be deemed to be a disclosure. 13. As far as reason No. 2 regarding finance lease and the difference in the treatment for accounting purposes is concerned, she submitted that there was no occasion for the AO in the first round to appreciate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishment in Delhi was not an industrial undertaking. It was merely an office where the work of duplication and distribution of software developed by the parent company was undertaken. The requirement of a minimum number of employees was also not fulfilled. It was also not registered as an industrial undertaking. These issues were neither raised nor discussed in the original assessment proceedings. 17. Further, as per para 10 of the 10-CCB Report, the address was shown as Gurgaon. This implied that the Delhi Division had closed and shifted to Gurgaon, which fact was never disclosed. Ms. Bansal pointed out that the statutory Auditor engaged by the Assessee had issued qualifying remarks as claim under Section 80-IB of the Act as regards the maintenance of accounts. The Chartered Accountant i.e., S.R. Batliboi Associates who completed the tax audit on 30th March, 2005 declined to certify the genuineness and appropriateness of the claim under Section 80-IB of the Act. Form 10-CCB was certified by another Chartered Accountant firm i.e., Gaurav Gupta Associates on 31st March, 2005. This required verification and, therefore, the re-opening of the assessment was justified. 18. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... March, 2010 which is after the expiry of 4 years from the end of the relevant assessment order. Therefore, the first proviso to Section 147 is attracted. 21. The jurisdictional requirement that has to be fulfilled for justifying such re-opening of assessment where an assessment originally has been made under Section 143(3) of the Act and where the re-opening is after the expiry of 4 years from the end of the relevant AY is that the Revenue has to show that some income chargeable to tax escaped assessment by reason of the failure on the part of the Assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year . 22. Importantly, Section 147 underwent a significant change by the Direct Tax Laws (Amendment) Act, 1987 with effect from 1st April, 1989. The Supreme Court in CIT v . Kelvinator of India Ltd . ( 2010 ) 320 ITR 561 ( SC ) has held that after 1st April, 1989, the AO has the power to re-open the assessment in terms of first proviso to Section 147 W of the Act provided there is tangible material to come to the conclusion that there is escapement of income from assessment. Placing re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o disclose fully and truly all material facts. 26. The expression will not necessarily amount to disclosure as used in Explanation 1 to Section 147 of the Act brings in an element of subjectivity and also the requirement of assessing on a case-to-case basis where in fact there has been a full disclosure by virtue of the Assessee producing the account books and other evidence in the first instance. This explanation, therefore, would not relieve the AO of the burden of demonstrating the Assessee s failure to make a full and true disclosure of all material facts necessary for the assessment for the AY in question. 27. A second aspect of the matter is that the above jurisdictional requirement should be shown to have been fulfilled from the reasons for re-opening of the assessment. In other words, the reasons must speak for themselves. The mandatory jurisdictional requirement in terms of the first proviso to Section 147 of the Act will not be fulfilled if the reasons do not themselves clearly indicate that there was in fact a failure by the Assessee to make a full and true disclosure of all material facts. The reasons have to explain what the material was that was not disclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal Income', it has been mentioned in para 13 that the amount of Rs . 48,85,74,591 /- debited to the P L A / c under schedule 17 as 'Fixed Assets Written off' has been added back while computing the taxable income for want of verification and supporting documents . From a perusal of the 'Computation sheet of Total Income' it becomes clear that this amount has not been added to the taxable income . Thus income to the extent of Rs . 4,85,74,591 /- has escaped assessment for failure on the part of the assessee . 30. Therefore, all that reason (1) suggests is that there was failure on the part of the Assessee to compute and declare true taxable income; in reason (3) it is stated that income had escaped assessment for failure on the part of the Assessee . This does not satisfy the requirement of the Act. 31. What Ms. Bansal has sought to urge during the course of the submissions before this Court is not even urged in the counter-affidavit. All that is stated is that despite what the Assessee has averred being prima facie in the order, the Revenue still needs to verify that fact. The audited accounts were already available with the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al requirement in terms of the proviso to Section 147 even as regards Reason No. 2. Turning to the counter-affidavit on this aspect, what is stated qua this reason too is, again, a reproduction of the same reason. Thereafter, it is stated as under: As per the Accounting Standards AS - 19, finance lease rentals would be segregated into principal and interest, and the charge to the revenue statement would comprise of depreciation and interest . In the notes to account para - 5, it has been declared that lease payment of Rs . 2,41,52,274 /- has been made during the year . The assessee has debited interest charges of Rs . 87,32,289 /- under the head interest on finance leases in the P L A / c and Rs . 1,54,19,985 /- under the head payment of lease ( principal ) for motor vehicles in the computation of the income . The claim made in the underlined portion is totally incorrect and against the law . The assessee has actually deducted the amount of Rs . 1,54,19,985 /- from the taxable income which is totally wrong as in the case of financial lease any payment on account of principal is of the nature of capital expenditure a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A complete disclosure is made in the balance sheet. Note 5 to the accounts also explained this. In the later AY i.e., AY 2005-06, the AO again examined this issue and accepted the explanation offered by the Assessee. 38. The Court is of the view that Reason No. 2 is also, therefore, not a valid reason for re-opening of the accounts. 39.1 At this stage, it requires to be noted that in CIT v . Usha International Limited ( supra ) , a Full Bench of this Court by a majority of 2:1 held that the fresh tangible material need not be something external to the assessment record. If there was material which formed part of the assessment record which the AO did not consider in the first instance, then such material, according to the majority, would fall within the scope of Section 147(b) of the Act. 39.2 What is significant as far as the said decision is concerned, is that the original assessment was processed under Section 143. The question was of re-opening the assessment within 4 years of the end of the assessment order for the AY in question. In fact the questions formulated by the Full Bench read as under: (i) What is meant by the term change of opinion? (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC ) appears to overlook the fact that the said decision was in the context of Section 147(b) of the Act as it stood prior to the amendment with effect from 1st April, 1989. 39.6 Consequently, the Court is of the view that as pointed out by the opinion of the other member of the Bench, R.V. Easwar, J. in Usha International Ltd . v . CIT , the law declared by the Full Bench of this Court in CIT v . Kelvinator of India Ltd . ( 2002 ) 256 ITR 1 ( Del ) ( FB ) which was upheld by the Supreme Court is still good law and no watering down of the said judgment would be permissible. As rightly pointed out by him, the decisions in A . L . A . Firm v . CIT [ 1991 ] 189 ITR 285 ( SC ) was in the context of Section 147(b) of the Act as it stood prior to 1st April, 1989 and the case was predominantly concerned with the question as to what would constitute information within the meaning of Section 147(b) of the Act. 40. In any event, as already pointed out, Reasons Nos. 1, 2 and 3 in the present case do not offer a sufficient justification for re-opening of the assessment. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... context of paras 2 (a) - (h) which cannot be acted upon by the Assessee. In fact, in view of each of the items of classification in the Auditor s report, there is addition to the Assessee s income in the revised return. 44. The Court is, therefore, satisfied that none of the reasons for re-opening the assessment satisfy the legal requirement as stipulated in the proviso to Section 147 of the Act. 45. In this context, it must also be noted that the issue concerning duplication of blank CD with the master media amounting to manufacture was considered in the Assessee s own case by the Supreme Court in CIT v . Oracle Software India Ltd . ( 2010 ) 320 ITR 546 ( SC ). It was categorically held that processing of blank CDs, dedicating them to a specific use, constitutes manufacture in terms of Section 80-IA(12)(b) read with Section 33B of the Income Tax Act . It was further concluded by the Supreme Court that marketed copies are goods and if they are goods then the process by which they become goods would certainly fall within the ambit of Section 80-IA(12)() read with Section 33B because an industrial undertaking has been defined in Sectoin 33B ..... X X X X Extracts X X X X X X X X Extracts X X X X
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