Whether when AO allows an expenditure as revenue in nature during original assessment, any attempt to treat same as capital expenditure in reassessment would amount to change of opinion - YES: HC

THE issue before the Bench is - Whether when AO allows an expenditure as revenue in nature during original assessment, any attempt to treat the same as capital expenditure in reassessment would amount to change of opinion. And the verdict goes in favour of the assessee.

Facts of the case

The assessee is a company. Present writ petition has been filed by the assessee to sought quashing of the Notice dated 28th March, 2012 issued by the ACIT u/s 148 in relation to the AY 2005-06 as well as the Order dated 25th February, 2013 rejecting the Petitioner's objections thereto. It was contended by the assessee's counsel that, as more than four years had elapsed from the end of the relevant AY 2005-06, ACIT could not have issued the notice without coming to the conclusion that he had reason to believe that income had escaped assessment by virtue of the fact that the assessee had failed to disclose fully and truly all material facts necessary for its assessment. In the present case, apart from making a bald assertion that there was a failure on the part of the assessee to disclose fully and truly all material facts, no details thereof were furnished in the reasons for reopening the assessment and hence, the initiation of reassessment proceedings was bad-in-law. Secondly it was contended that the AO had passed the original assessment order on 30th December, 2008 u/s 143(3). Hence, the purported re-opening of the assessment was based merely on a “change of opinion” which was impermissible in law. In the present case, admittedly, a scrutiny assessment was done and an assessment order was passed under section 143(3) of the Act for the Assessment Year 2005-06 and the proposed re-assessment was sought to be done after the expiry of four years from the end of the relevant assessment year. In such a situation, the first proviso to section 147 of the Act was attracted. Thus, no action for initiation of re-assessment proceedings for AY 2005-06 could be initiated unless the income chargeable to tax had escaped assessment by reason of the failure on the part of the Petitioner to disclose fully and truly all material facts.

Before HC, assessee's counsel had submitted that apart from making a bald assertion that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment, no details whatsoever were given with reference to the same. On the other hand, the Revenue's counsel had submitted that the reasons clearly stated that there had been a failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment and therefore, the ACIT was justified in initiating re-assessment proceedings.

Held that,

++ it is true that the reasons for initiating the reassessment proceedings does in fact state that there was a failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment. However, merely making this bald assertion is not enough. It is now well settled that the reasons which are recorded by the Assessing Officer for re-opening the assessment, are the only reasons which can be considered. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons are the manifestation of the mind of the Assessing Officer and therefore, should be selfexplanatory and should not keep the Assessee guessing for the reasons. The reasons provide the link between the conclusion and the evidence. The reasons recorded must be based on evidence so that in the event of a challenge, the Assessing Officer must be able to justify the same based on the material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment for that assessment year, so as to establish the vital link between the reasons and the evidence. This vital link is the safeguard against arbitrary re-opening of a concluded assessment;

++ in the present case, as stated earlier, there are absolutely no details as to which fact or material was not disclosed by the Petitioner that led to it's income escaping assessment. There is merely a bald assertion in the reasons that there was a failure on the part of the petitioner to disclose fully and truly all material facts. In our view, this is not enough. It is equally important that Respondent No.1 clearly sets out what facts or other material was not disclosed by the Petitioner that had led to the income escaping assessment as contemplated under section 147 of the Act. This is absent in the present case. In our view therefore, on this ground alone, the Petitioner is entitled to succeed in this writ petition. Even otherwise, from the record we find that the Petitioner has disclosed fully and truly all material facts for the Assessment Year 2005-06 and that Respondent No.1 considered the same before making his assessment order under section 143(3) of the Act. This is clear from the return of income filed by the Petitioner for Assessment Year 2005- 06 on 31st October 2005, the queries raised and the material sought for by Respondent No.1 by its letters dated 1st June 2007 and 7th August 2007, the Petitioner's replies thereto dated 16th July 2007, 13th August 2007 and 1st September 2008 and the assessment order passed on 30th December 2008 under section 143(3);

++ in the return of income filed on 31st October 2005, the Petitioner enclosed its balance-sheet as well as its Auditor's Certificate u/s 35(2AB) certifying the claim for weighted deduction in respect of research and development expenditure incurred at Lupin Research Park, Pune. Note No.3 to Annexure VII to Enclosure IV of the Auditor's Certificate stated that legal and professional charges included payments made towards patent applications filed outside India amounting to Rs.2,70,97,115/-, Rs.12,59,783/- towards consultancy fees and Rs.4,77,027/- paid to outsiders for collaborative study. It is not in dispute that these three figures are the subject matter of the notice issued u/s 148. In fact, the notice u/s 148 proceeds on the basis that these expenses were wrongly claimed as a revenue expenditure when they were in the nature of a capital expenditure. Thereafter, with reference to these very issues, Respondent No.1 called for information from the Petitioner by its letters dated 1st June 2007 and 7th August 2007. As stated earlier, all details were furnished by the Petitioner by its letters dated 17th July 2007, 13th August 2007 and 1st September 2008. In fact, by their letter dated 13th August 2007, the Petitioner categorically informed Respondent No.1 that the total legal and professional charges incurred for filing patent applications were Rs.328.36 lakhs. As per section 35(2AB), this amount was allowable as a revenue expenditure but they had claimed weighted deduction only on Rs.57.39 lakhs because the sum of Rs.270.97 lakhs was paid for filing patent applications outside India. The details thereof were also furnished by the petitioner. Thereafter, by their letter dated 1st September 2008, the petitioner once again enclosed details of the legal and professional charges. Thereafter, AO passed an order u/s 143(3) and chose not to disallow the claim of the Petitioner for deductions claimed towards legal and professional charges incurred for filing patent applications. The AO therefore accepted the deductions claimed by the Petitioner. He however rejected the Petitioner's claims with respect to some other issues, which do not form the subject matter of the re-assessment proceedings. It is pertinent to note that where Respondent No.1 disagreed with the Petitioner's contentions, he gave his reasons for doing so but where the contentions were accepted, there was no discussion with reference to the same in the assessment order. All this clearly goes to show that all material facts with reference to the deductions claimed by the Petitioner in respect of the legal expenses and charges, were disclosed by the Petitioner not only during the original assessment proceedings but also during the scrutiny assessment, which culminated in the assessment order dated 30th December 2008. We therefore find that in fact there had been no failure on the part of the Petitioner to disclose fully and truly all material facts as required under the first proviso to section 147;

++ we also find force in the submission of Mr. Pardiwala that the initiation of re-assessment proceedings for the Assessment Year 2005-06 is merely based on a “change of opinion”. On a perusal of the reasons for initiating reassessment proceedings, we find that it is not even the case of Respondent No.1 that any new tangible material was brought to his notice which led him to believe that income had escaped assessment. As stated earlier, all material facts were disclosed by the Petitioner in proceedings that were undertaken u/s 142(1) r/w 143(2), which finally culminated in the assessment order dated 30th December 2008 under section 143(3). It is therefore evident that Respondent No.1 after passing the original assessment order dated 30th December 2008 has changed his opinion and issued the impugned notice under section 148. The reasons for the impugned notice as well as the impugned order proceed on the basis that a patent is a capital asset and hence expenditure incurred towards filing of patent applications should have been treated as capital expenditure. Since it was treated as a revenue expenditure, there was computation of excessive loss which resulted in income escaping assessment. Therefore now, despite the fact that in the original assessment order this very expenditure was allowed as a revenue expenditure, Respondent No.1 now seeks to treat the same as a capital expenditure. This to our mind is nothing but a “change of opinion”, and hence Respondent No.1 had no jurisdiction to re-open the assessment proceedings. For all the aforesaid reasons, rule is made absolute and the writ petition is granted in terms of prayer clauses (a) and (c). However, there shall no order as to costs.