2014 (10) TMI 40 - HC - Income Tax

Court Invalidates Reassessment Beyond 4 Years

The court set aside the notice dated 30.03.2009 and the subsequent order dated 23.11.2009, ruling in favor of the petitioner/assessee. It was determined ... Reopening of assessment u/s 147 r.w. 148 - Royalty payments were of a revenue or capital nature - Held that:- The income chargeable to tax which has escaped assessment must be occasioned, by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, for that assessment year. Mr Syali, the learned senior counsel, appearing on behalf of the petitioner/assessee, this pre-condition has not been met, there has been no failure on the part of the petitioner/assessee to make a full and true disclosure of the material facts necessary for the assessment – The AO had specifically asked in his questionnaire as to the nature of the royalty payments and the assessee was asked to justify the same - the AO considered the aspect of royalty payment and also noted the fact that the petitioner had claimed the same as revenue expenditure - the AO disallowed ₹ 34,63,07,373/- out of the entire claim of ₹ 70,60,25,973/- and made an addition – the condition that the assessee must not have made full and true disclosure of the material facts is not satisfied and the re-opening cannot be permitted - The notice dated 30.03.2009 and all proceedings pursuant thereto including the impugned order dated 23.11.2009 are set aside - validity of assumption of jurisdiction u/s 147/148 and have not examined the merits of the matter as to whether the royalty payments were of a revenue or capital nature – Decided in favour of assessee. Issues Involved:1. Validity of the notice under Section 148 of the Income-tax Act, 1961.2. Compliance with the first proviso to Section 147 of the Income-tax Act.3. Disclosure of material facts by the assessee.4. Distinction between change of opinion and non-disclosure of material facts.5. Jurisdiction for reassessment beyond four years.Detailed Analysis:1. Validity of the Notice under Section 148 of the Income-tax Act, 1961:The notice dated 30.03.2009 under Section 148 and the order dated 23.11.2009 rejecting the objections filed by the assessee are challenged. The assessment was completed under Section 143(3) on 04.03.2005, and the notice under Section 148 was issued on 30.03.2009, which is beyond four years from the end of the relevant assessment year (2002-03). Therefore, the first proviso to Section 147 is applicable.2. Compliance with the First Proviso to Section 147 of the Income-tax Act:For reassessment proceedings beyond four years, it is essential that the income chargeable to tax which has allegedly escaped assessment must be due to the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The petitioner/assessee argued that there was no such failure, and the reasons supplied did not indicate any specific material fact that was not disclosed. The Revenue contended that the reasons to believe indicated a failure on the part of the assessee to fully and truly disclose the material facts necessary for assessment.3. Disclosure of Material Facts by the Assessee:The petitioner/assessee disclosed the royalty payment of Rs. 70,60,25,973/- as a revenue expenditure in the original assessment proceedings. This was under consideration by the Assessing Officer, who issued a questionnaire specifically dealing with royalty payments. The details were submitted, and the entire aspect of royalty was discussed in the original assessment order dated 04.03.2005. The Assessing Officer had disallowed Rs. 34,63,07,373/- out of the entire claim of Rs. 70,60,25,973/- and made an addition on account thereof.4. Distinction Between Change of Opinion and Non-Disclosure of Material Facts:The court noted that merely having a reason to believe that income had escaped assessment is not sufficient for reopening assessments beyond four years. The escapement of income must be occasioned by the failure on the part of the assessee to disclose material facts fully and truly. This condition was not satisfied in this case. The court cited several judgments, including Haryana Acrylic Manufacturing Company v. Commissioner of Income Tax, Microsoft Corporation (I) Pvt. Ltd v. Deputy Commissioner of Income Tax, and Bombay Stock Exchange v. Deputy Director of Income Tax, which held that a bald assertion of non-disclosure is not sufficient. It must be specifically indicated which material fact was not disclosed.5. Jurisdiction for Reassessment Beyond Four Years:The court found that the petitioner had disclosed all material facts during the original assessment proceedings. There was no new fact that emerged as a result of further or deeper examination of the existing documents or any other fresh material. Therefore, the condition for reopening the assessment beyond four years was not satisfied. The court concluded that the notice dated 30.03.2009 and all proceedings pursuant thereto, including the impugned order dated 23.11.2009, are set aside.Conclusion:The writ petition is allowed, and the impugned notice and order are set aside. The court clarified that the decision was based on the validity of the assumption of jurisdiction under Section 147/148 and did not examine the merits of whether the royalty payments were of a revenue or capital nature.