TaxTMI 
TaxTMI 
2017 (7) TMI 967
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....nd Distribution License Agreement ('SDDLA') for duplication and distribution of software. The SDDLA was valid for five years, which was renewable on a year-to-year basis. The last renewal relevant to the AY in question was on 1st June, 2002. The Assessee is also stated to be engaged in the activity of software development. 3. On 31st January, 2005, the Assessee filed its return declaring an income of Rs. 81,26,08,093. The Assessee inter alia claimed deduction under Section 80-IB and Section 10A of the Act. 4. The return was picked up for scrutiny and a notice under Section 143(2) of the Act was served upon the Assessee. Pursuant thereto, the Assessee revised its return on 31st March, 2005 declaring an income of Rs. 1,05,02,40,927. The assessment was completed under Section 143(3) of the Act by the AO by an order dated 17th February, 2006 making the following disallowances and enhancing the total taxable income to Rs. 1,62,64,66,350: (i) Disallowance of part of royalty expense claimed of Rs. 18,12,77,408. Reliance was placed on earlier years i.e., AY 2000-01, 2001-02 and 2002-03 wherein the basis of the disallowance was application of Section 92 (old section) to the facts of the....
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....the relevant AY i.e., 2003-04, which period ended on 31st March, 2008, the AO issued the impugned notice under Section 148 of the Act to the Assessee on 31st March, 2010 stating that he had reasons to believe that income had escaped assessment. A summary of the reasons for re-opening the assessment, as communicated to the Assessee by the AO were as under: i. Failure of the Assessee to add back cost of acquisition of software by the development division (as reported in para 17 (1) of the Tax Audit Report for the year ended 31st March, 2003) for the computation of total income for the AY in question. The proposed addition on this score was Rs. 55,38,275. ii. A wrong claim made by the Assessee of the principal amount of Rs. 1,54,19,985 included in finance lease rentals paid during AY 2003-04. iii. Failure of the Assessee to add back the capital expenditure in the nature of 'Fixed Assets Written Off' debited to the profit and loss account (as mentioned in Note 13 of the Notes to Revised Computation of Taxable Income for the year ended 31st March, 2003) in the sum of Rs. 4,85,74,591. iv. Incorrect and excess claim by Assessee of deduction under Section 80-IB of the Act for the p....
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.... treatment was in fact explained in detail by the Assessee in the accounts itself. (iv) The issue concerned financial lease in which the lessee does not become the owner of the equipment. For accounting purposes, economic ownership is accepted. In terms of AS-19, which had to be followed, the payment made pursuant to the financial lease was divided between interest and principal on estimate basis. However, for the purposes of income tax, since the lessee is not the owner, whatever is paid to the owner is lease rent only, which is wholly allowable. The nomenclature for accounting was not determinative for tax purposes. Sufficient disclosure was made even at the time of the original assessment proceedings in the balance sheet produced before the AO. (v) During the assessment proceedings for AY 2005-06, a questionnaire dated 28th November, 2008 was issued to the Assessee by the AO. The queries were answered and the details furnished by the Assessee in reply thereto. The said reply was accepted by the AO in the assessment order dated 29th December, 2008 for the said AY 2005-06 without drawing any adverse inference. More than a year thereafter, the re-opening was sought to be done f....
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....ssed by the Supreme Court in CIT s. Oracle Software India Ltd. (2010) 320 ITR 546 (SC). (x) Reason No. 5 (i) given by the AO was that there was no evidence of Delhi Division of OIPL being registered as an 'industrial undertaking', it was pointed out that there was no such requirement in law. This Court has in Praveen Soni v. CIT (2011) 333 ITR 324 (Del) held that the said registration was not essential. In any event, there was no failure by the Assessee to furnish all the material facts. (xi) Reason No. 5 (ii) was that the Assessee had failed to disclose a material fact concerning change of its location from Delhi to Gurgaon. It is pointed out that this change was a presumption drawn by the Revenue and was not a fact. Reference is made to the report in Form 10-CCB. (xii) Reason No. 5 (iii) was that the highly paid executives could not possibly be construed as workers. It was pointed out that there are no particulars for arriving at the above conclusion which was based entirely on surmises and conjectures. (xiii) Reason No. 6 was that the Auditors had stated that the deduction under Section 80-IB was only an estimate. It was pointed out that Form 10-CCB was signed by anothe....
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....ase and the difference in the treatment for accounting purposes is concerned, she submitted that there was no occasion for the AO in the first round to appreciate this distinction. The mere filing of the revised return would not amount to a full and true disclosure. As regards the claim for deduction under Section 80-IB of the Act was concerned, she pointed out that in the original assessment order while disallowing the said claim, the limited issue considered by the AO was that the duplication and distribution of products was not tantamount to manufacturing of any product. It was during the course of assessment proceedings for the other AYs that the AO referred to the assessment record of the present AY i.e., AY 2003-04 and found that the Assessee had failed to prepare its accounts properly and to disclose all relevant facts. It was on that basis that he formed a reason to believe that income had escaped assessment. 14. Mrs. Bansal submitted that the assessment order dated 17th February, 2006 for AY 2003-04 gives the working of the calculation of royalty and that it had been computed on the total turnover of Rs. 124.81 crores. Royalty was to be computed on the sub-license, ....
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....v Gupta & Associates on 31st March, 2005. This required verification and, therefore, the re-opening of the assessment was justified. 18. Relying on the decision in Raymonds Woollen Mills v. ITO (1999) 236 ITR 34 (SC), Ms. Bansal submitted that at the time of initiation of the proceedings under Section 147 of the Act, the AO had to only examine whether there was prima facie some material on the basis of which the assessment should have been re-opened. It is not open to the Court in exercise of its writ jurisdiction to go into the sufficiency and/or correctness of the material which forms the basis of the re-opening of the assessment. The Court was not expected to act as an appellate authority. Reliance was placed on the decision in Bawa Abhai Singh v. DCIT (2002) 253 (ITR) 83 (Del.). 19. As regards the finance lease rentals, Ms. Bansal pointed out that the Assessee had actually deducted a sum of Rs. 1,54,19,985 from the taxable income. In the case of a financial lease, payment on account of principal was in the nature of capital expenditure. Therefore, it could not be deducted from the profits. The statement of the Assessee that it added back the depreciation on the assets acquire....
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....T v. Kelvinator of India Ltd. (supra), this Court in Coperion Ideal Private Limited v. Commissioner of Income Tax-II (2015) 378 ITR 525 (Del.) held as under: "14..... The Supreme Court emphasised that although the power to reopen is much wider after the amendment, the words "reason to believe" needed a schematic interpretation and that the Assessing Officer ought not to be given power to reopen the "reassessment has to be based on fulfilment of certain pre-condition and if the concept of 'change of opinion' is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer" 23. It has been repeatedly emphasized in several decisions including the aforementioned decision in CIT v. Kelvinator of India Ltd. (supra) that the re-opening of an assessment on the same material that was available with an AO during the original assessment proceedings would be a case of mere change of opinion. 24. What Explanation (1) does is to clarify that the mere production of the account books or other evidence by the Assesse....
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....yond merely repeating the language of the provision regarding the failure of the Assessee to make a full and true disclosure of material facts. They should indicate in what manner was there such a failure. 28. In many of the cases, where the re-opening of an assessment is challenged, the Revenue tries to make up for the obvious defect in the reasons themselves which do not spell out the reasons by providing a justification at the stage of disposal of the objections or later in the counter-affidavit when the re-opening is challenged by a writ petition. This, again, is impermissible in law. Since the reasons must speak for themselves, a subsequent attempt to supply the omission at the stage of an order disposing of the objections raised by the Assessee or providing them in the counter-affidavit in reply to the writ petition or even worse, making good that defect in the course of arguments before the Court, will simply not suffice. 29. In the present case, what Ms. Bansal attempted to do as regards reasons (1) and (3) falls under the last category. Her submission that a perusal of the accounts did not reveal that the Assessee added back the capital expenditure on acquisition of soft....
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....he Assessee has averred being 'prima facie' in the order, the Revenue still needs to verify that fact. The audited accounts were already available with the AO and formed part of the assessment record. They did not require re-assessment proceedings for the purpose of such verification. In any event, the Court declines to accept reasons (1) and (3) as being valid reasons for re-opening of the assessment. 32. This was not a case where the AO could not have, from the assessment record itself, gleaned the information. Even at the stage of hearing the objections of the Assessee to the re-opening, the AO could have realized the mistake in re-opening the assessment for these two reasons. 33. Turning now to Reason No. 2 which pertains to finance lease, the actual reason for re-opening reads thus: "2. In para 4 to the 'Notes to Computation of Total Income', the following noting have been given: "Under the Accounting Standard AS-19, issued by the Institute of Chartered Accountants of India, assets acquired under financial lease are required to be capitalized in the books of accounts. The interest charges pertaining to the finance lease payments are also debited to the Profit and....
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....diture and is not deductible from the profits. Thus the income of Rs. 1,54,19,985/- has escaped assessment for wrong claim on the part of the assessee. The issue regarding reduction of payment of lease rental (principal) in the computation of income, by the assessee was not considered by the AO during the assessment proceedings u/s 143(3)." 36. The Court finds that there has been a full disclosure of all material facts of the Assessee. In the original assessment proceedings itself, the Assessee clearly sets out the basis for the difference in the accounting treatment of a finance lease and the tax treatment. It was explained by the Assessee in the accounts itself that under the mandatory accounting standard (AS-19) issued by the Institute of Chartered Accountants, the assets acquired under the finance lease were required to be capitalized in the books of accounts of the lessee. In the AY in question, the Assessee had incurred financial lease rent expenditure on the motor vehicles taken on finance lease. The difference was, as far as the Act is concerned, for the purposes of tax treatment. The lessee was allowed only to claim the deduction for lease rent in respect of leased asset....
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....d under Section 147 of the Act, even within four year, if an assessee has furnished full and true particulars at the time of original assessment with reference to income alleged to have escaped assessment and whether and when in such cases reopening is valid or invalid on the ground of change of opinion? (iii) Whether the bar or prohibition under the principle 'change of opinion' will apply even when the Assessing Officer has not asked any question or query with respect to an entry/note, but there is evidence and material to show that the Assessing Officer had raised queries and questions on other aspects? (iv) Whether and in what circumstances Section 114 (e) of the Evidence Act can be applied and it can be held that it is a case of change of opinion? 39.3 It becomes clear from para 9 of the said judgment that the Court was discussing the decision in CIT v. H.P. Sharma (1980) 122 ITR 675 (Del) which dealt with Section 147 as it stood prior to 1st April, 1989. This then led the majority in para 10 of the opinion to note that the said decision was not dealing with Section 147 of the Act as amended with effect from 1st April, 1989 but was with reference to Section 147(b) of the ....
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....ussed the basis for the computation of royalty and notice that it is @ 30% of the Indian published price. The segmental breakup in fact was before the AO. 42. When that matter travelled to the CIT (A), a remand report was called from the AO. In his report dated 1st May, 2002 no adverse comments were made by the AO in relation to the written submissions of the Assessee. The CIT (A) in his order dated 18th November, 2002 accepted the registered disallowance on the premise that the activity of duplication did not amount to manufacture. As regards the unit not being registered as an industrial undertaking, this was not based on any fresh tangible material. Also, the change of the undertaking from Delhi to Gurgaon was already disclosed in the report Form 10-CCB. The objections as regards the highly paid executives not being construed as workers, again, appears to proceed on surmises and conjectures. 43. As pointed out by the Assessee for the subsequent AY 1995-96, the Revenue has accepted that the Assessee fulfils the eligibility conditions under Section 80-IA and 80-IB of the Act. The fact that there was a separate auditor in respect of the Form 10-CCB for the purposes of claiming de....