2017 (4) TMI 871 - AT - Income Tax

Tribunal validates receipt, disallows fees, invalidates STP loss reassessment. Directions for AO verification

Polaris Financial Technology Ltd. (formerly known as Polaris Software Lab Ltd.) Versus Asst. Commissioner of Income-Tax, Company Circle-V, Chennai

Polaris Financial Technology Ltd. (formerly known as Polaris Software Lab Ltd.) Versus Asst. Commissioner of Income-Tax, Company Circle-V, Chennai - TMI Issues Involved:1. Jurisdiction of reassessment initiated after four years.2. Non-adjustment of loss from STP units against profit from other section 10A units.3. Receipt of Rs. 7.50 crores from Orbitech Ltd. and its taxability.4. Disallowance of legal and professional fees.Detailed Analysis:1. Jurisdiction of Reassessment Initiated After Four Years:The appeal contested the reassessment initiated after four years from the end of the relevant assessment year, arguing no failure to disclose fully and truly all material facts and claiming no new or tangible material informed the Revenue’s case. The Tribunal examined the reasons for reopening the assessment and upheld the AO’s action regarding the second reason (receipt of Rs. 7.50 crores from Orbitech Ltd.), finding that the assessee did not disclose fully and truly all material facts relevant for its assessment. This satisfied the condition of the first proviso to section 147, making the reassessment notice valid on this count.2. Non-Adjustment of Loss from STP Units Against Profit from Other Section 10A Units:The first reason for reopening was that the assessee had not adjusted the loss of the STP units at Hyderabad and Gurgaon against the profit from other section 10A units, inflating its claim for deduction under section 10A. The Tribunal found that the assessee had claimed the deduction without adjusting the loss during the assessment proceedings, which was verified and allowed. This constituted a change of opinion, barring reassessment. Therefore, the reassessment on this ground was invalid.3. Receipt of Rs. 7.50 Crores from Orbitech Ltd. and Its Taxability:The second reason was the receipt of Rs. 7.50 crores from Orbitech Ltd. during the merger, which the AO considered as income assessable under section 28(iv). The Tribunal found contradictions in the assessee’s claims and accounts, indicating that the receipt was not fully disclosed as a reimbursement for merger expenses. The Tribunal upheld the reassessment on this count, stating the receipt should be considered income unless the assessee provided external evidence supporting it as a capital receipt for merger expenses. The Tribunal directed the AO to verify the assessee’s claim and decide based on factual findings.4. Disallowance of Legal and Professional Fees:The final issue was the disallowance of Rs. 13.53 lakhs paid as legal and professional fees for acquiring a US company, Data Inc., USA. The AO disallowed the expenditure as capital in nature. The Tribunal confirmed the disallowance, finding no infirmity in the AO’s decision, as the expenditure was indeed for acquiring a company.Conclusion:The Tribunal partly allowed the assessee’s appeal, validating the reassessment for the receipt of Rs. 7.50 crores from Orbitech Ltd. and confirming the disallowance of legal and professional fees. The reassessment on the non-adjustment of loss from STP units was invalidated as a change of opinion. The appeal was partly allowed for statistical purposes, with directions for the AO to verify the assessee’s claims regarding the receipt from Orbitech Ltd.