2013 (4) TMI 599 - HC - Income Tax

Court Invalidates Reopening of Assessment Under Income-tax Act

The court ruled in favor of the petitioner, finding the notice for reopening the assessment under section 148 of the Income-tax Act, 1961 invalid. The ... Reopening of assessment u/s 148 – reason to believe - assessee has made payment towards Voluntary Retired Scheme which was allowed as revenue expenditure. The CBDT has issued a Circular in which it has stated that any ex gratia amount which results in an enduring benefit to assessee should be treated as capital expenditure. In view of this, the said VRS payment is required to be disallowed as capital expenditure. Revenue therefore, reason to believe that the amount chargeable to tax has escaped assessment. Therefore, notice u/s. 148 is issued. Petitioner challenged the same in this court. Held that - In our opinion, the Assessing Officer could not have issued the impugned notice on the basis of C.B.D.T circular. In that view of the matter, the circular of C.B.D.T may be a trigger, on the basis of which, the Assessing Officer may himself be satisfied that income chargeable to tax in a given case had escaped assessment. Such a circular by itself, in our opinion, cannot be the tangible material required for Assessing Officer to hold a belief that income chargeable to tax had escaped assessment. The Apex Court in the case of CIT v. Kelvinator of India Ltd. [2010 (1) TMI 11 – SC] has held that even post amendment in section 147 of the Act with effect from 1.4.1989, the concept of change of opinion has not been given a go-by. Even after the amendment in section 147, the Assessing Officer must have some tangible material to hold a belief that income chargeable to tax had escaped assessment. Thus on the basis of some general observation and discussion on principles for treating an expenditure either revenue or capital in nature, the Assessing Officer cannot claim to have been in possession of tangible material to hold a belief that income chargeable to tax had escaped assessment. we are satisfied that in the present case, notice for reopening has been issued without jurisdiction. In the result, the petition is allowed. Issues Involved:1. Validity of the notice for reopening the assessment under section 148 of the Income-tax Act, 1961.2. Whether the expenditure on Voluntary Retirement Scheme (VRS) should be treated as capital or revenue expenditure.3. The applicability and effect of the Central Board of Direct Taxes (CBDT) circular dated 23.1.2001 on the assessment.Issue-wise Detailed Analysis:1. Validity of the notice for reopening the assessment under section 148 of the Income-tax Act, 1961:The petitioner challenged the notice dated 15.3.2001 issued by the respondent-Assessing Officer to reopen the assessment for the assessment year 1997-98. The original assessment was completed under section 143(3) of the Act on 28.3.2000. The petitioner contended that the reopening was based on a mere change of opinion, as the Assessing Officer had already examined and accepted the deduction of the VRS payment in the original assessment. The court noted that the reopening notice was issued within four years from the end of the relevant assessment year, and thus, the requirement of failure to disclose material facts by the assessee was not necessary. However, the court emphasized that the Assessing Officer must have tangible material to hold a belief that income chargeable to tax had escaped assessment. The court concluded that the Assessing Officer did not possess such tangible material and that the reopening was based on a mere change of opinion, rendering the notice invalid.2. Whether the expenditure on Voluntary Retirement Scheme (VRS) should be treated as capital or revenue expenditure:The petitioner argued that the VRS expenditure was revenue in nature, having been expended wholly and exclusively for the purpose of business. The Assessing Officer, in the original assessment, had examined the claim and accepted it. The petitioner relied on several judicial precedents where similar expenditures were considered revenue in nature. The court noted that the Assessing Officer had raised queries regarding the VRS expenditure during the original assessment, and the petitioner had provided detailed explanations and supporting judicial decisions. The court observed that the Assessing Officer, being fully satisfied with the petitioner's claim, allowed the deduction in the original assessment. Thus, the court held that the reopening of the assessment to revisit the same claim was not justified.3. The applicability and effect of the Central Board of Direct Taxes (CBDT) circular dated 23.1.2001 on the assessment:The Assessing Officer sought to reopen the assessment based on the CBDT circular, which suggested treating ex-gratia payments resulting in enduring benefits as capital expenditure. The petitioner contended that the circular did not mandate treating VRS payments as capital expenditure and that it was contrary to settled legal positions. The court examined the contents of the circular and concluded that it only laid down general guidelines for assessing officers and did not provide a definitive rule for treating VRS payments as capital expenditure. The court held that the circular could not be the sole basis for reopening the assessment and that the Assessing Officer must independently form a belief based on tangible material. The court further noted that the circular could not override judicial decisions that treated similar expenditures as revenue in nature. Consequently, the court found that the reopening notice based on the CBDT circular was without jurisdiction.Conclusion:The court allowed the petition, quashing the impugned notice dated 15.3.2001 and ruling that the reopening of the assessment was invalid. The court emphasized that the reopening was based on a mere change of opinion and that the CBDT circular could not serve as tangible material for reopening the assessment. The court reaffirmed that the VRS expenditure was rightly treated as revenue in nature in the original assessment.