2010 (11) TMI 570 - AT - Income Tax

Tribunal upholds decision on reassessment period, ITG networking equipment classified as computer hardware

The Tribunal upheld the CIT(A)'s decision, dismissing the department's appeal and the assessee's cross-objections. The reassessment proceedings were ... Addition of income - Assessee disclosed fully and truly all material facts necessary for assessment - the first proviso to section 147 debarred the initiation of reassessment proceedings as the notice u/s 148 is issued on 18/23.07.2007 which is beyond the four years from the end of relevant assessment year which period ends on 31.03.2003 – It was held that assessment made thereon was bad in law Depreciation @ 60% on ITG networking equipments - it was the contention of Ld. AR that this issue is covered in favour of the assessee by the Special Bench decision in the case of DCIT v. Data Craft India Ltd - Such devices used as part of the computer in its functions and, thus, it can be termed as ‘computer’ only, therefore, eligible for depreciation @ 60% - In the result, the appeal filed by the Department as well as the CO filed by the assessee both are dismissed Issues Involved:1. Validity of reassessment proceedings initiated under Section 147/148 of the Income Tax Act.2. Correct rate of depreciation applicable to ITG networking equipment.Issue-wise Detailed Analysis:1. Validity of Reassessment Proceedings:The primary issue was whether the reassessment proceedings initiated under Section 147/148 were valid. The CIT(A) held that the initiation of reassessment proceedings was illegal as the first proviso to Section 147 was applicable. The reassessment was initiated after four years from the end of the relevant assessment year, and there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. The department contended that the reassessment was validly initiated, arguing that the case was opened under Section 147/148 following due procedure.The assessee filed objections against the reassessment, arguing that the issue of depreciation on networking equipment was specifically examined during the original assessment, and the claim was allowed after due explanation. The reassessment notice was issued on the grounds that depreciation on networking equipment was allowed at a higher rate of 60% instead of 25%, leading to under-assessment of income.The Tribunal noted that the reasons recorded for reopening the assessment did not indicate any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The Tribunal referenced two Delhi High Court decisions (Well Intertrade Pvt. Ltd. v. ITO and Haryana Acrylic Manufacturing Co. v. CIT-IV) which established that for the proviso to Section 147 to apply, there must be a specific averment of failure to disclose material facts. Since no such averment was made, the reassessment proceedings were deemed invalid.2. Rate of Depreciation on ITG Networking Equipment:The second issue was the correct rate of depreciation applicable to ITG networking equipment. The assessee claimed depreciation at 60%, arguing that these equipments were part of computer hardware. The Assessing Officer contended that the equipment should be classified under 'Plant and Machinery' and thus eligible for depreciation at 25%.The Tribunal referred to the Special Bench decision in DCIT v. Data Craft India Ltd., which clarified that routers and switches could be classified as computer hardware when used along with a computer and when their functions are integrated with the computer. The Tribunal found that the ITG networking equipment, including routers, switches, and modems, performed functions such as communication and control, making them integral to computer systems. Thus, they were eligible for depreciation at 60%.Conclusion:The Tribunal upheld the CIT(A)'s decision, dismissing the department's appeal and the assessee's cross-objections. The reassessment proceedings were invalid as they were initiated beyond the permissible period without any failure on the part of the assessee to disclose material facts. The ITG networking equipment was correctly classified as computer hardware, eligible for depreciation at 60%.