Software upgradation expenses remain revenue expenditure; reassessment under section 147 quashed for change of opinion

The Punjab and Haryana HC allowed the assessee's writ petition challenging reassessment proceedings under section 147 initiated after 4 years. The AO sought to treat software upgradation and development expenses as capital expenditure instead of revenue expenditure previously accepted. The HC held that reassessment cannot be initiated merely due to change of opinion after the AO had originally accepted the return treating such expenses as revenue. The expenditures were disclosed during original assessment and were rightly treated as revenue since they facilitated the assessee's advertising and marketing business. The HC set aside the reassessment proceedings on grounds of both delay and merits, deciding in favour of the assessee.

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Issues Involved:

1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961 for reassessment.
2. Compliance with the conditions under Section 143(3) for reopening the assessment.
3. Whether the reassessment proceedings initiated after 4 years constitute a change of opinion.
4. Classification of expenses as revenue or capital in nature.

Summary of Judgment:

1. Validity of Notice under Section 148:
The petitioner sought quashing of the notice dated 30.03.2019 issued under Section 148 of the Income Tax Act, 1961 and the order dated 10.07.2019 disposing of objections related to the assessment year 2012-13. The petitioner argued that the notice for reassessment was issued beyond the permissible period of 4 years, as the original assessment was completed on 05.03.2015.

2. Compliance with Conditions under Section 143(3):
The petitioner contended that for reassessment under Section 143(3), two conditions must be met: the Assessing Officer must have reasons to believe that income chargeable to tax has escaped assessment, and such escapement must be due to the assessee's failure to disclose fully and truly all material facts. The petitioner argued that these conditions were not satisfied in their case.

3. Change of Opinion:
The petitioner argued that the reassessment proceedings were initiated based on a change of opinion, which is not permissible after a period of 4 years. The petitioner cited various judgments, including *State Bank of Patiala vs. Commissioner of Income-tax* and *Principal Commissioner of Income-tax-2 vs. L & T Ltd.*, to support their claim that reassessment based on a change of opinion should be set aside.

4. Classification of Expenses:
The reassessment was initiated on the grounds that certain expenses on computer supplies and software should have been capitalized rather than treated as revenue expenses. The petitioner contended that these expenses were disclosed during the original assessment and were rightly treated as revenue expenses. The court referred to judgments such as *Commissioner of Income-tax, Delhi-IV vs. Indian Visit.com (P.) Ltd.* and *Principal Commissioner of Income Tax-2 vs. Kitchen Express Overseas Ltd.*, which held that expenditures on software development and services facilitating existing infrastructure should be treated as revenue expenses.

Conclusion:
The court concluded that the notice for reassessment was issued beyond the permissible period of 4 years, and the reassessment proceedings were based on a change of opinion. Therefore, the writ petition was allowed, and the initiation of reassessment proceedings was set aside on both counts of delay and merits.

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