1997 (11) TMI 128 - AT - Income Tax

Tribunal Upholds CIT(A)'s Order, Invalidates Reassessment under Section 147

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order quashing the reassessment. The reassessment proceedings initiated under Section ... Assessing Officer, Assessment Year, Audit Objection, Point Of Law Issues Involved:1. Validity of the reassessment proceedings initiated under Section 147 of the Income-tax Act.2. Nature of the expenditure claimed as 'technical collaboration fee' - whether capital or revenue.Issue-wise Detailed Analysis:1. Validity of the reassessment proceedings initiated under Section 147 of the Income-tax Act:The Revenue's appeal contested the order of the Commissioner of Income-tax (Appeals) [CIT(A)], which quashed the reassessment made after invoking Section 147 of the Income-tax Act. The primary contention was that the CIT(A) failed to appreciate that the assessee's claim of technical collaboration expenses as revenue expenditure resulted in underassessment, thus justifying the reassessment under Explanation 1(a) to Section 147.The original assessment was completed on 31-12-1985, but was later reopened under Section 147. The audit party, upon scrutinizing the records, found discrepancies related to the technical collaboration fee of Rs. 7,02,292 claimed by the assessee. The audit party suggested that the expenditure was capital in nature, not revenue, and recommended proper inquiry.The Assessing Officer (AO) issued a notice under Section 148 on 12-3-1990 and subsequently disallowed the claim, treating it as capital expenditure. The CIT(A) quashed the reassessment, stating that there was no omission or failure on the part of the assessee to disclose material facts. The CIT(A) relied on the Supreme Court's judgment in Indian & Eastern Newspaper Society v. CIT, which held that an audit party's opinion on a point of law cannot be regarded as 'information' for initiating reassessment proceedings under Section 147.The Revenue argued that the audit party only drew attention to factual aspects, not legal interpretations, and thus the AO had a valid basis for reassessment. However, the Tribunal noted that the AO's action was based on a change of opinion prompted by the audit party, which is not permissible under the law.2. Nature of the expenditure claimed as 'technical collaboration fee' - whether capital or revenue:The assessee claimed the technical collaboration fee of Rs. 7,02,292 as revenue expenditure. The agreement stipulated payments for the transfer of technical property, which the AO treated as capital expenditure. The CIT(A) found that the assessee had disclosed all material facts and that the AO's reassessment was merely a change of opinion.The Tribunal examined the nature of the expenditure, noting the distinction between capital and revenue expenditure. Capital expenditure is intended for securing something of enduring benefit, while revenue expenditure is operational and intended for the furtherance of business. The Tribunal referred to precedents, including the Supreme Court's decision in CIT v. Ciba of India Ltd., which emphasized analyzing the terms of the agreement to determine the nature of the expenditure.The Tribunal concluded that the AO's reassessment was based on an erroneous interpretation of the nature of the expenditure, influenced by the audit party's objection. The Tribunal upheld the CIT(A)'s order, finding no omission or failure on the part of the assessee and no valid basis for the reassessment.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order quashing the reassessment. The reassessment proceedings initiated under Section 147 were deemed invalid as they were based on a change of opinion and not on any failure by the assessee to disclose material facts. The technical collaboration fee was correctly claimed as revenue expenditure by the assessee.