THE issue before the Bench is - Whether when Revenue had issued
notice against the assesssee for reopening of assessment on the ground that
deduction under Section 10B had resulted in underassessment of the assessee’s
income, and the deduction on account of deferred revenue expenditure being
expenditure on technical know-how, was inadmissible and should have been
disallowed, it amounted to tangible material which had live link to validate a
legitimate formation of opinion. And the verdict goes against the
Revenue.
The assessee company is engaged in the business of manufacture and sale of optical and magnetic storage media. The assessee had two units in Noida and Greater Noida, both of which were export oriented units and eligible for deduction under section 10B. The assessee had claimed deduction under section 10B in respect of the profit derived from its unit in Noida, but not claimed any such deduction in respect of its Greater Noida unit on account of the unit being in loss. The assessee had also incurred expenditure on technical knowhow and deferred the cost of acquisition of technical knowhow for a period of six years while computing its taxable income. Accordingly a deduction of one sixth of this fee had been claimed by the assessee. In its return of income, filed in October 2005, the assessee had reported loss under the normal provisions of the Income Tax Act and book profit under section 115JB at a loss.
The AO raised various queries in October 2007, October 2008 and November 2008, and sought explanations from the assessee qua the claim under Section 10A/10B of the Act as well as claim of deduction of deferred revenue expenditure for technical know-how fee. Subsequently, accepting the assessee's explanation, the AO completed the assessment under section 143(3), whereby the assessee’s claim under Section 10B and deduction of deferred revenue expenditure for technical know-how fee was allowed. But the AO, in the assessment order of October 2008, restricted the assessee’s claim under section 10B, besides making other additions and disallowances, relating to transfer pricing adjustment, a 25 per cent disallowance of royalty as against actual expenditure and disallowance under section 14A read with Rule 8D, on expenses for earning exempt dividend income.
Subsequently, in May 2009, the AO passed an order under section 154 rectifying the assessment order, whereby the assessee's claim of deduction under section 10B, as allowed in the earlier assessment order, was reduced.
In May 2011, a notice was issued by the Commissioner, proposing to reassess the income of the assessee, under section 148. The reasons to believe pertained to deduction under Section 10B, whereby there was underassessment of the assessee’s income, and the deduction on account of deferred revenue expenditure being expenditure on technical know-how, was stated to be inadmissible, and should have been disallowed. This mistake had resulted in underassessment of income, involving tax effect, due to the failure on the part of the assessee to disclose true and correct particulars of its income, whereby reopening of the assessment was stated to be required by initiation of proceedings under section 147.
In appeal against the reassessment, the CIT rejected the assessee’s objections.
In a writ petition before the High Court, the assessee submitted that the issuance of notice for reassessment, issued after the expiry of four years, was barred by limitation under proviso to Section 147 as the assessee had made full and true disclosure of material facts. The notice under Section 148, seeking to reopen the assessment was based on change of opinion as no fresh information or tangible material had come to the knowledge of the AO.
Having considered the petition, the High Court held that,
++ with respect to the deductions under Section 10B, the record reveals that the petitioner along with the return of income had enclosed the profit and loss account of both the units as well as the computation of deduction under Section 10B in respect of both the units. In the notes filed to the computation of income, the petitioner had specifically disclosed that no deduction was being claimed in respect of the unit at Greater Noida on account of loss. Specific queries were raised by the AO with regard to the units eligible for deduction under Section 10B, which queries were replied to and detailed explanations rendered;
++ the original assessment disallowing the entire deduction claimed by the petitioner under Section 10B and the subsequent rectification on the same by the AO clearly establishes that the AO had formed a definite opinion on the claim of benefit under Section 10B as a deduction and also the fact that the unit of the petitioner at Greater Noida was eligible for such deduction. It further establishes that having formed an opinion, the AO now seeks to change the opinion and has thus sought to reopen the assessment;
++ the fact that the petitioner disclosed the deduction of deferred revenue expenditure on account of payment of technical know-how fee in the notes appended to the return of income and that a specific query was raised and responded to by the petitioner demonstrates that the petitioner has made true and full disclosure of all material facts. The original assessment framed after receiving the response to the questionnaire specifically dealing with the said issue further establishes that the AO had formed an opinion on the said claim of the petitioner;
++ the reasons to believe recorded by the Deputy Collector, CIT do not suggest that any fresh or further tangible material had come to the knowledge of the AO whereby a reasonable bonafide belief could or was formed that income had escaped assessment on account of failure of the assessee to disclose truly and fully the material facts;
++ there appears to be an intensive examination in the first instance in respect of the said issues that subsequently came to the knowledge of the AO whereby a subjective opinion could be prima facie formed that the assessee had failed to disclose truly and fully the material facts. There has to be a tangible material existing on record for the reasons to believe, which should have a direct nexus to the formation of such belief, which are now sought to be made the basis for reopening of the assessment. It was necessary for the AO to indicate specifically as to what other material or objective facts subsequently came to his knowledge whereby a subjective opinion could be prima facie formed that the assessee had failed to disclose truly and fully the material facts. There has to be a tangible material existing on record for the reasons to believe which should have a direct nexus to the formation of such belief;
++ in the case of the petitioner, with respect to the Assessment Year 2004-05, a similar issue with regard to the claim of deduction under Section 10B was raised by issuance of a notice under Section 148 by the Deputy Commissioner of Income Tax. The petitioner’s writ petition was allowed and the notice and the proceedings consequent thereto were quashed;
++ the court had held that when there was intensive examination in the first instance in respect of the issue, which was the basis for re-opening of assessment, it was necessary for the AO to indicate, what other material, or objective facts, constituted reasons to believe that the assessee had failed to disclose a material fact, necessitating reassessment proceedings. That is precisely the "tangible material" which has to exist on the record for the "reasons" (to believe" bearing a "live link with the formation of the belief". When the assessment is completed, as in the present instance, under Section 143 (3), after the AO goes through all the necessary steps of inquiring into the same issue, the reasons for concluding that reassessment is necessary, have to be strong, compelling, and in all cases objective tangible material. This court discerns no such tangible materials which have a live link that can validate a legitimate formation of opinion, in this case. It is not enough that the AO in the previous instance followed a view which no longer finds favour, or if the latter view is suitable to the revenue; those would squarely be change in opinion. Perhaps, in given fact situations, they can be legitimate grounds for revising an order of assessment under Section 263; but not for re-opening it, under proviso to Section 147. It was held that the impugned notice, under proviso to Section 147, and consequent reassessment proceedings, are beyond jurisdiction;
++ the Revenue had filed a special leave petition against this decision to appeal to the Supreme Court, which had been dismissed;
++ we are of the considered opinion that the assessee cannot be held to have failed to disclose truly and fully all the material facts. It is also not a case where fresh tangible material has come to the knowledge of the AO. The AO, at the time of original assessment, clearly formed an opinion on both the issues and a notice under Section 148 seeking to reopen the assessment is clearly an instance of change of opinion, which is impressible in law;
++ in view of the above, the impugned order dated 1.02.2013 is set aside and the notice dated 04.05.2011 and the proceedings initiated consequent thereto are hereby quashed. The writ petition is accordingly allowed with costs of Rs.10,000/-.
Facts of the
case
The assessee company is engaged in the business of manufacture and sale of optical and magnetic storage media. The assessee had two units in Noida and Greater Noida, both of which were export oriented units and eligible for deduction under section 10B. The assessee had claimed deduction under section 10B in respect of the profit derived from its unit in Noida, but not claimed any such deduction in respect of its Greater Noida unit on account of the unit being in loss. The assessee had also incurred expenditure on technical knowhow and deferred the cost of acquisition of technical knowhow for a period of six years while computing its taxable income. Accordingly a deduction of one sixth of this fee had been claimed by the assessee. In its return of income, filed in October 2005, the assessee had reported loss under the normal provisions of the Income Tax Act and book profit under section 115JB at a loss.
The AO raised various queries in October 2007, October 2008 and November 2008, and sought explanations from the assessee qua the claim under Section 10A/10B of the Act as well as claim of deduction of deferred revenue expenditure for technical know-how fee. Subsequently, accepting the assessee's explanation, the AO completed the assessment under section 143(3), whereby the assessee’s claim under Section 10B and deduction of deferred revenue expenditure for technical know-how fee was allowed. But the AO, in the assessment order of October 2008, restricted the assessee’s claim under section 10B, besides making other additions and disallowances, relating to transfer pricing adjustment, a 25 per cent disallowance of royalty as against actual expenditure and disallowance under section 14A read with Rule 8D, on expenses for earning exempt dividend income.
Subsequently, in May 2009, the AO passed an order under section 154 rectifying the assessment order, whereby the assessee's claim of deduction under section 10B, as allowed in the earlier assessment order, was reduced.
In May 2011, a notice was issued by the Commissioner, proposing to reassess the income of the assessee, under section 148. The reasons to believe pertained to deduction under Section 10B, whereby there was underassessment of the assessee’s income, and the deduction on account of deferred revenue expenditure being expenditure on technical know-how, was stated to be inadmissible, and should have been disallowed. This mistake had resulted in underassessment of income, involving tax effect, due to the failure on the part of the assessee to disclose true and correct particulars of its income, whereby reopening of the assessment was stated to be required by initiation of proceedings under section 147.
In appeal against the reassessment, the CIT rejected the assessee’s objections.
In a writ petition before the High Court, the assessee submitted that the issuance of notice for reassessment, issued after the expiry of four years, was barred by limitation under proviso to Section 147 as the assessee had made full and true disclosure of material facts. The notice under Section 148, seeking to reopen the assessment was based on change of opinion as no fresh information or tangible material had come to the knowledge of the AO.
Having considered the petition, the High Court held that,
++ with respect to the deductions under Section 10B, the record reveals that the petitioner along with the return of income had enclosed the profit and loss account of both the units as well as the computation of deduction under Section 10B in respect of both the units. In the notes filed to the computation of income, the petitioner had specifically disclosed that no deduction was being claimed in respect of the unit at Greater Noida on account of loss. Specific queries were raised by the AO with regard to the units eligible for deduction under Section 10B, which queries were replied to and detailed explanations rendered;
++ the original assessment disallowing the entire deduction claimed by the petitioner under Section 10B and the subsequent rectification on the same by the AO clearly establishes that the AO had formed a definite opinion on the claim of benefit under Section 10B as a deduction and also the fact that the unit of the petitioner at Greater Noida was eligible for such deduction. It further establishes that having formed an opinion, the AO now seeks to change the opinion and has thus sought to reopen the assessment;
++ the fact that the petitioner disclosed the deduction of deferred revenue expenditure on account of payment of technical know-how fee in the notes appended to the return of income and that a specific query was raised and responded to by the petitioner demonstrates that the petitioner has made true and full disclosure of all material facts. The original assessment framed after receiving the response to the questionnaire specifically dealing with the said issue further establishes that the AO had formed an opinion on the said claim of the petitioner;
++ the reasons to believe recorded by the Deputy Collector, CIT do not suggest that any fresh or further tangible material had come to the knowledge of the AO whereby a reasonable bonafide belief could or was formed that income had escaped assessment on account of failure of the assessee to disclose truly and fully the material facts;
++ there appears to be an intensive examination in the first instance in respect of the said issues that subsequently came to the knowledge of the AO whereby a subjective opinion could be prima facie formed that the assessee had failed to disclose truly and fully the material facts. There has to be a tangible material existing on record for the reasons to believe, which should have a direct nexus to the formation of such belief, which are now sought to be made the basis for reopening of the assessment. It was necessary for the AO to indicate specifically as to what other material or objective facts subsequently came to his knowledge whereby a subjective opinion could be prima facie formed that the assessee had failed to disclose truly and fully the material facts. There has to be a tangible material existing on record for the reasons to believe which should have a direct nexus to the formation of such belief;
++ in the case of the petitioner, with respect to the Assessment Year 2004-05, a similar issue with regard to the claim of deduction under Section 10B was raised by issuance of a notice under Section 148 by the Deputy Commissioner of Income Tax. The petitioner’s writ petition was allowed and the notice and the proceedings consequent thereto were quashed;
++ the court had held that when there was intensive examination in the first instance in respect of the issue, which was the basis for re-opening of assessment, it was necessary for the AO to indicate, what other material, or objective facts, constituted reasons to believe that the assessee had failed to disclose a material fact, necessitating reassessment proceedings. That is precisely the "tangible material" which has to exist on the record for the "reasons" (to believe" bearing a "live link with the formation of the belief". When the assessment is completed, as in the present instance, under Section 143 (3), after the AO goes through all the necessary steps of inquiring into the same issue, the reasons for concluding that reassessment is necessary, have to be strong, compelling, and in all cases objective tangible material. This court discerns no such tangible materials which have a live link that can validate a legitimate formation of opinion, in this case. It is not enough that the AO in the previous instance followed a view which no longer finds favour, or if the latter view is suitable to the revenue; those would squarely be change in opinion. Perhaps, in given fact situations, they can be legitimate grounds for revising an order of assessment under Section 263; but not for re-opening it, under proviso to Section 147. It was held that the impugned notice, under proviso to Section 147, and consequent reassessment proceedings, are beyond jurisdiction;
++ the Revenue had filed a special leave petition against this decision to appeal to the Supreme Court, which had been dismissed;
++ we are of the considered opinion that the assessee cannot be held to have failed to disclose truly and fully all the material facts. It is also not a case where fresh tangible material has come to the knowledge of the AO. The AO, at the time of original assessment, clearly formed an opinion on both the issues and a notice under Section 148 seeking to reopen the assessment is clearly an instance of change of opinion, which is impressible in law;
++ in view of the above, the impugned order dated 1.02.2013 is set aside and the notice dated 04.05.2011 and the proceedings initiated consequent thereto are hereby quashed. The writ petition is accordingly allowed with costs of Rs.10,000/-.
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