TaxTMI 
TaxTMI 
2020 (11) TMI 66
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....nt was completed under Section 143(3) of the Act and there was no failure on the part of assessee to disclose fully and truly all the material facts during the course of original assessment. According to him it is only a mere change of opinion without any new material or information so as to reopen the concluded assessment. 3. The Brief facts relevant to this issue are that the assessee filed the Return of Income for the Assessment Year 2005-06 on 30.10.2005 and the assessment was completed under Section 143(3) of the Act on 31.8.2007 determining the Book Profit at Rs. 1,21,01,885 again the returned Book Profit of Rs. 1,16,98,788. In the original assessment, there was an addition to the Book Profit towards provision for warranty. On appeal the addition was deleted by the CIT(Appeals). The assessment was reopened by issue of Notice under Section 148 of the Act on 7.6.2011 by recording the reason for reopening as follows : Regarding reopening of assessment, the learned Authorised Representative submitted that the reopening of assessment is bad in law. He relied on the following judgments : (i) Dell India Pvt. Ltd. Vs. JCIT 64 Taxman.com 68 (Kar) (ii) CIT Vs. H....
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....com 57 (Bom). (iv) Tata Business Support Services Ltd. Vs.DCIT 59 taxmann.com 76 (Bom H C) According to the ld. AR, Section 147 of the Act does not give arbitrary powers to Assessing Officer to reopen the concluded assessment merely only on the basis of mere change of opinion and cases can be reopened only if there is "tangible material" to come to conclusion that there is escapement of income from assessment. He relied on the judgment of Hon'ble Supreme Court in the case of CIT Vs. Kelvinator of India Ltd. 320 ITR 561 (SC). According to ld. AR during the course of original assessment proceedings, the information regarding provision towards liquidated damages and R&D expenses were called for and filed before the Assessing Officer vide letter dt.15.06.2007 and 18.07.2007. These were scrutinized by the Assessing Officer and certain expenses were allowed. No action under Section 147 of the Act was taken, the said assessment cannot be reviewed without any tangible or fresh material before the A.O. so as to reopen the assessment. He submitted that the judgment of CIT Vs. Kelvinator of India Ltd. (supra) was valid in the following cases : i) CIT Vs. Hewlett Packa....
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....y claim under the provisions of the Act and on the other hand scope of Expln. 2 to Section 147 is such that the Assessing Officer is free to re-examine the correctness and decided the tax aspect, tax apply relief and allowances granted are in terms of provisions of the Act and is not to revise assessment in terms of Section 147 of the Act. She has relied on the Hon'ble Kerala High Court in the case of Popular Vehicles & Services Ltd. 191 taxman 333 (Ker). She also relied on the judgements of Hon'ble jurisdictional High Court in the case of Rinku Chakraborthy 20 taxman.com 09 (Kar) wherein it was held that if in the original assessment the income liable to tax has escaped assessment due to oversight and inadvertence or a mistake committed by the ITO, the ITO has the jurisdiction to reopen the original assessment. It is not necessary that for such reopening of such assessment the information is to be derived from external source of any kind or disclosure of new and important matters subsequent to the original assessment. Even if the information is obtained from the record of the original assessment after a proper investigation from the material on record or the facts disclose....
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....application of mind by the Assessing Officer, to the materials produced prior to the reopening of the assessment, to conclude that he has reason to believe that income has escaped assessment. Unless that basic jurisdictional requirement is satisfied - a postmortem exercise of analysing the materials produced subsequent to the reopening will not make an inherently defective reassessment order valid. (v) The crucial link between the information made available to the Assessing Officer and the formation of the belief should be present. The reasons must be self evident, they must speak for themselves. (vi) The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. To put it in other words, something therein, which is critical to the formation of the belief must be referred to. Otherwise, the link would go missing. (vii) The reopening of assessment under Section 147 is a potent power and should not be lightly exercised. It certainly cannot be invoked casually or mechanically. (viii) If the original assessment is processed under Sec....
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....e condemned or dubbed as a fishing or roving inquiry. The expression "reason to believe" appearing in Section 147 suggests that if the Income Tax Officer acts as a reasonable and prudent man on the basis of the information secured by him that there is a case for reopening, then Section 147 can well be pressed into service and the assessments be reopened. As a consequence of such reopening, certain other facts may come to light. There is no ban or any legal embargo under Section 147 for the Assessing Officer to take into consideration such facts which come to light either by discovery or by a fuller probe into the matter and reassess the assessee in detail if circumstances require. (xv) The test of jurisdiction under Section 143 of the Act is not the ultimate result of the inquiry but the test is whether the income tax officer entertained a "bona fide" belief upon the definite information presented before him. Power under this section cannot be exercised on mere rumours or suspicions. (xvi) The concept of "change of opinion" has been treated as a built in test to check abuse. If there is tangible material showing escapement of income, the same would be sufficient f....
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....ot required to finally ascertain the factum of escapement of the tax and it is sufficient that the Assessing Officer had cause or justification to know or suppose that the income had escaped assessment. It is also well settled that the sufficiency and adequacy of the reasons which have led to the formation of a belief by the Assessing Officer that the income has escaped the assessment cannot be examined by the court. Now, we go through the provisions of Section 147 of the Act. 147. Income escaping assessment.-- If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year)." 6.3 Considering the above, the Apex....
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....hereinbelow the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows: "7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression `reason to believe' in Section 147. A number of representations were received against the omission of the words 'reason to believe' from Section 147 and their substitution by the 'opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, 'reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression 'has reason to believe' in place of the words 'for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same." For the afore-stated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs." 6.4 The reopening ....
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....ll the material facts necessary for the assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put on record in black and white all the material facts. The reasons recorded should be clear and unambiguous. Our attention was also drawn to the decision of the Hon'ble Karnataka High Court in the case of CIT and ACIT v. Hewelett Packard Digital Global Solutions Ltd., ITA No. 406 of 2007, judgment dated 19.09.2011, wherein the Hon'ble Karnataka High Court after making a reference to the decision of the Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. v. R.B. Wadkar [2004] 137 Taxmann 479 (Bom.) observed as follows:- "7. It is observed in the said judgment that the reason recorded by the Assessing Officer no where state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is for the Assessing Officer to disclose and open his mind through reasons. He has to speak through his reasons. It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assess....
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.... dismissed." 8. Being so, in our opinion the reopening of assessment which is already concluded under Section 143(3) of the Act of the assessment cannot be reopened without any allegation by the Assessing Officer that there was non-disclosure of true and correct facts by the assessee while framing the original assessment. Hence we are inclined to annul the assessment. Since we have quashed the assessment, we are refrained to go into the other grounds of appeal raised by the assessee in this appeal. In the result, the appeal in ITA No.2181/Bang/2018 is allowed. ITA Nos.2182 to 2189/Bang/2018. 9. The first common ground in ITA Nos.2183 to 2189 is with regard to disallowance of expenditure relating to design and development expenses. Considering it as capital expenditure the said expenditure brings value addition and benefit of enduring nature to the business of the assessee. The assessee incurred expenditure towards R & D to meet the specific requirements of the customer. It mostly comprised of training and statutory expenses, audit fees for performance review, travelling, telephone and checking charges. The said expenses said to be incurred for the sale of products and to m....
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....ital expenditure. This ground of assessee is partly allowed. This ground in ITA Nos.2183/Bang/2018 to 2189/Bang/2018 are partly allowed. 12. Next ground with regard to disallowance of R & D expenses on the ground that the said expenditure brings value addition and benefit of enduring nature. This is a common ground in ITA Nos.2182 to 2189/Bang/2018. This expenditure was disallowed by the lower authorities on the reason that R & D is not revenue in nature. It provides enduring benefit to the assessee by means of continuous process to improvise new product which raised the value of the product. This expenditure was capitalized and reflected in work in progress and ready for use and depreciation may be subsequently claimed when it is ready to use. 13. The learned Authorised Representative submitted that the R & D expenditure was incurred for the purpose of business and they pertain to the salary paid to the employees. Accordingly these expenditure are to be allowable as revenue expenditure under Section 137 of the Act and as does not include any capital expenditure incurred for the purpose of capital equipments. This expenditure does not brought in any enduring benefit to the as....
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....eing so, the assessee cannot have any grievance on the treatment given by the lower authorities towards this expenditure. He drew our attention to the treatment given by the assessee to this expenditure in its financial statements which was reproduced by the ld. CIT(Appeals) in para 6.3 for the Assessment Year 2009-10. 15. We have heard the rival contentions, perused and carefully considered the material on record. We have carefully gone through the various judgements cited. As rightly pointed out by the ld. DR, the assessee has treated the portion of the R & D expenditure as revenue and another portion as capital expenditure in its financial statements. The Assessing Officer has allowed the revenue portion of the R & D expenditure claimed by the assessee, however not allowed capital portion of the R & D expenditure. He has gone by the treatment given by the assessee towards R & D expenditure in its financial statements. Now the contention of the assessee that these Books of Accounts cannot be conclusive for the purpose of Income Tax assessment and the entire R & D expenditure is in the revenue filled and entire expenditure has to be allowed. However, the assessee is not able to....
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.... it is observed by the Assessing Officer that the assessee utilized the borrowed funds for capital work in progress and addition to fixed assets and it is not a revenue expenditure so as to allow and it is in the capital nature. On appeal, the CIT(Appeals) confirmed the same. The assessee is in appeal before us. 21. We have heard the rival contentions, perused and carefully considered the material on record. As rightly pointed out by the lower authorities, this interest expenditure was with regard to on account of loans availed which was invested in capital work in progress and as an addition to fixed assets. Being so, this is in capital field and no interest could be allowed as revenue expenditure. The lower authorities are justified in treating the claim of the assessee as capital work in progress. However, the assessee filed petition for admitting additional grounds stating as follows : " 5.3 The ld. CIT (Appeals) and A.O., while attributing the interest towards Capital Work-in-Progress (CWIP), have erred in considering the entire closing balance of CWIP as on the balance sheet date which included the opening balance brought forward from earlier year, instead of cons....