THE issue before the Bench is - Whether re-assessment can be resorted to on ground that software licence fees paid to non-resident was in nature of royalty and thus, was capital in nature. No is the answer.
Facts of the case
The assessee is a Company engaged in I.T. Enabled Services and Software Development. The assessee filed its return of income for A.Y. 2008-2009 declaring income. The case was selected for scrutiny and notices under section 142(1) and under section 143(2) were issued and served upon the assessee - assessee. In the notice dated 28/7/2011, specific query regarding "Software License Fees" as well as deduction under section 10(B), was raised. The assessee furnished details required. AO passed the assessment order under section 143(3) making several additions to income under various heads of the income of the assessee. Thereafter beyond the period of four years of the concerned assessment year, AO issued the impugned notice under section 148 reopening the assessment for the A.Y. 2008-2009. On receipt of the reasons recorded for reassessment, the assessee raised various objections submitting that there was no omission or failure on the part of the assessee to disclose truly and fully all material facts and therefore, the initiation of the reassessment proceedings beyond four years, was not valid. AO disposed of the objections raised by the assesse. Hence, present Special Civil Application under Article 226 of the Constitution of India challenging the impugned reassessment proceedings for the A.Y. 2008-2009.
Having heard the parties, the Court held that,
++ in the present case initiation of reassessment proceedings is beyond 4 years from the assessment year. Therefore, unless and until it is observed and found that the income has escaped assessment due to the failure on the part of the assessee to disclose truly and fully all material facts for the assessment, the Assessing Officer is not authorized to make reassessment even in the event of his having reasonable belief that any income chargeable to tax has escaped assessment for any assessment year. As per the first proviso to section 147, assessment can be reopened under section 147 after expiry of 4 years only if (1) assessee failed to make a return under section 139 or in response to the notice under section 142(1) or under section 148 and he failed to disclose truly and fully all material facts necessary for the assessment. Once the case of the assessee is not covered by the first proviso to section 147, reassessment proceedings beyond the period of four years from the end of the relevant assessment year would be without jurisdiction and bad in law. If all material facts are furnished by the assessee and there remained no omission or failure on the part of the assessee to disclose truly and fully all material facts, initiation of reassessment proceedings beyond the period of 4 years is not permission and shall be wholly without jurisdiction;
++ the assessment for the A.Y. 2008-2009 is sought to be reopened on the ground that the "Software License Fees" paid to the foreign companies was in nature of "Royalty" and thus, "Capital Expenditure" and therefore, it attracts section 195 of the Income Tax Act and therefore, TDS was required to be deducted. However, it is required to be noted that in the original assessment, full particulars with respect to "Software License Fees" by the assessee to the foreign companies was disclosed. Not only that the assessee claimed the same as revenue expenditure. The notice was issued under section 143(3) of the Act and the Assessing Officer also vide communication / notice dated 28/7/2011 called upon the assessee to furnish necessary documents which include the complete details of "Software License Fees". The assessee was also directed to furnish relevant documentary evidences to establish and prove that "Software License Fees" is in nature of revenue. The assessee submitted complete details of "Software License Fees" and justified its claim that the "Software License Fees" is in the nature of revenue expenditure and not capital expenditure. Only thereafter the Assessing Officer while framing the assessment, treated the payment of "Software License Fees" made to the Foreign Companies as revenue expenditure and allowed the deductions claimed and also accepted the claim of the assessee of deduction under section 10(B) of the Income Tax Act;
++ it cannot be said that the assessee did not disclose fully and truly all material facts necessary for the assessment with respect to Software License Fees paid to foreign companies and also with respect to deduction claimed under sec.10(B) of the Act, and therefore, the income chargeable to tax has been escaped due to the failure on the part of the assessee to disclose fully and truly all material facts. Under the circumstances, the condition precedent for invoking powers under section 147 of the Income Tax Act to initiate reassessment proceedings beyond the period of 4 years are not at all satisfied.
++ in the case of Niko Resources Ltd., while considering the scope and ambit of powers to be exercised under section 147 of the Income Tax Act by the Assessing Officer, while reopening the assessment beyond the period of 4 years, the Division Bench of this Court had held that Assessing Officer, who is authorized to issue notice under section 148 of the Act for reassessment on his having a reason to believe that income chargeable to tax had escaped assessment for any assessment year, can assess or reassess such income and also any such other income chargeable to tax, which has escaped the assessment. However, no such action is permissible after lapse of 4 years from the end of the relevant assessment year unless income chargeable to tax has escaped assessment on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of such assessment. The onus is on the assessee to reveal the primary facts and to draw the inferential facts would be the responsibility of the Assessing Officer. Once having revealed from the record that the assessee disclosed full and complete facts and on scrutiny, at the time of original assessment all these details are examined, no change of opinion is permissible merely because there was some error earlier on the part of the Assessing Officer himself or because he choose not to opine on the issue or even when he changes his mind and interprets the material or law otherwise than what was done by him.
++ there does not appear to be failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment, the initiation of the impugned reassessment proceedings which are initiated beyond the period of four years, are not permissible and the same cannot be sustained and on that ground alone, the impugned reassessment proceedings deserve to be quashed and set aside.
++ impugned notice under section 148 for A.Y. 2008-2009 is hereby quashed and set aside and the impugned reassessment proceedings of reopening assessment for the A.Y. 2008-2009 are hereby terminated on the aforesaid ground alone. This Court has not expressed any opinion on merits as to whether the payment of "Software License Fees" to the foreign companies, can be said to be "revenue expenditure" as claimed by the assessee or in the nature of "capital expenditure" as claimed by the revenue and the said question is kept open.
The assessee is a Company engaged in I.T. Enabled Services and Software Development. The assessee filed its return of income for A.Y. 2008-2009 declaring income. The case was selected for scrutiny and notices under section 142(1) and under section 143(2) were issued and served upon the assessee - assessee. In the notice dated 28/7/2011, specific query regarding "Software License Fees" as well as deduction under section 10(B), was raised. The assessee furnished details required. AO passed the assessment order under section 143(3) making several additions to income under various heads of the income of the assessee. Thereafter beyond the period of four years of the concerned assessment year, AO issued the impugned notice under section 148 reopening the assessment for the A.Y. 2008-2009. On receipt of the reasons recorded for reassessment, the assessee raised various objections submitting that there was no omission or failure on the part of the assessee to disclose truly and fully all material facts and therefore, the initiation of the reassessment proceedings beyond four years, was not valid. AO disposed of the objections raised by the assesse. Hence, present Special Civil Application under Article 226 of the Constitution of India challenging the impugned reassessment proceedings for the A.Y. 2008-2009.
Having heard the parties, the Court held that,
++ in the present case initiation of reassessment proceedings is beyond 4 years from the assessment year. Therefore, unless and until it is observed and found that the income has escaped assessment due to the failure on the part of the assessee to disclose truly and fully all material facts for the assessment, the Assessing Officer is not authorized to make reassessment even in the event of his having reasonable belief that any income chargeable to tax has escaped assessment for any assessment year. As per the first proviso to section 147, assessment can be reopened under section 147 after expiry of 4 years only if (1) assessee failed to make a return under section 139 or in response to the notice under section 142(1) or under section 148 and he failed to disclose truly and fully all material facts necessary for the assessment. Once the case of the assessee is not covered by the first proviso to section 147, reassessment proceedings beyond the period of four years from the end of the relevant assessment year would be without jurisdiction and bad in law. If all material facts are furnished by the assessee and there remained no omission or failure on the part of the assessee to disclose truly and fully all material facts, initiation of reassessment proceedings beyond the period of 4 years is not permission and shall be wholly without jurisdiction;
++ the assessment for the A.Y. 2008-2009 is sought to be reopened on the ground that the "Software License Fees" paid to the foreign companies was in nature of "Royalty" and thus, "Capital Expenditure" and therefore, it attracts section 195 of the Income Tax Act and therefore, TDS was required to be deducted. However, it is required to be noted that in the original assessment, full particulars with respect to "Software License Fees" by the assessee to the foreign companies was disclosed. Not only that the assessee claimed the same as revenue expenditure. The notice was issued under section 143(3) of the Act and the Assessing Officer also vide communication / notice dated 28/7/2011 called upon the assessee to furnish necessary documents which include the complete details of "Software License Fees". The assessee was also directed to furnish relevant documentary evidences to establish and prove that "Software License Fees" is in nature of revenue. The assessee submitted complete details of "Software License Fees" and justified its claim that the "Software License Fees" is in the nature of revenue expenditure and not capital expenditure. Only thereafter the Assessing Officer while framing the assessment, treated the payment of "Software License Fees" made to the Foreign Companies as revenue expenditure and allowed the deductions claimed and also accepted the claim of the assessee of deduction under section 10(B) of the Income Tax Act;
++ it cannot be said that the assessee did not disclose fully and truly all material facts necessary for the assessment with respect to Software License Fees paid to foreign companies and also with respect to deduction claimed under sec.10(B) of the Act, and therefore, the income chargeable to tax has been escaped due to the failure on the part of the assessee to disclose fully and truly all material facts. Under the circumstances, the condition precedent for invoking powers under section 147 of the Income Tax Act to initiate reassessment proceedings beyond the period of 4 years are not at all satisfied.
++ in the case of Niko Resources Ltd., while considering the scope and ambit of powers to be exercised under section 147 of the Income Tax Act by the Assessing Officer, while reopening the assessment beyond the period of 4 years, the Division Bench of this Court had held that Assessing Officer, who is authorized to issue notice under section 148 of the Act for reassessment on his having a reason to believe that income chargeable to tax had escaped assessment for any assessment year, can assess or reassess such income and also any such other income chargeable to tax, which has escaped the assessment. However, no such action is permissible after lapse of 4 years from the end of the relevant assessment year unless income chargeable to tax has escaped assessment on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of such assessment. The onus is on the assessee to reveal the primary facts and to draw the inferential facts would be the responsibility of the Assessing Officer. Once having revealed from the record that the assessee disclosed full and complete facts and on scrutiny, at the time of original assessment all these details are examined, no change of opinion is permissible merely because there was some error earlier on the part of the Assessing Officer himself or because he choose not to opine on the issue or even when he changes his mind and interprets the material or law otherwise than what was done by him.
++ there does not appear to be failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment, the initiation of the impugned reassessment proceedings which are initiated beyond the period of four years, are not permissible and the same cannot be sustained and on that ground alone, the impugned reassessment proceedings deserve to be quashed and set aside.
++ impugned notice under section 148 for A.Y. 2008-2009 is hereby quashed and set aside and the impugned reassessment proceedings of reopening assessment for the A.Y. 2008-2009 are hereby terminated on the aforesaid ground alone. This Court has not expressed any opinion on merits as to whether the payment of "Software License Fees" to the foreign companies, can be said to be "revenue expenditure" as claimed by the assessee or in the nature of "capital expenditure" as claimed by the revenue and the said question is kept open.
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