Reassessment Quashed as Limitation Ran From Original Assessment, Not Revision

The case examined whether a completed scrutiny assessment could be reopened beyond four years to reduce depreciation claimed on computer software from 60% to 25%, and whether such reopening was legally valid. The assessee had fully disclosed its claim in the return, tax audit report, and depreciation schedule, and the Assessing Officer had accepted it during the original scrutiny assessment. The High Court held that reopening under Section 147 was barred by limitation since there was no failure to make a full and true disclosure, and the reassessment amounted to a mere change of opinion, which is impermissible in law. It further ruled that a limited revision under Section 263 on a different issue did not extend or reset the limitation period for reopening depreciation. On merits, the Court held that prior to AY 2003–04, when no separate entry for computer software existed, depreciation at 60% was valid under the “computers” category, especially given consistent acceptance in earlier years. The appeal was dismissed.

FACTS:

• The present appeal is against the order of the Hon’ble Income-Tax Appellate Tribunal (Tribunal/ ITAT) dated 10.02.2012, passed in terms of the provisions of the Income-Tax Act, 1961 (Act) for Assessment Year 2002–03, the assessee, “Cognizant Technology Solutions India Pvt ltd.” filed its return of income within time. The assessment was picked for scrutiny and notice were issued to the assessee for claims in the return related to depreciation on computer software at the rate of 60%.
• The authorized representatives and Chartered Accountant of the assessee furnished the details called for. The assessment was completed u/s 143(3) by order dated 17.03.2005, making certain additions/disallowances but accepting the claim of depreciation thereafter subject to Suo- moto revision u/s 263 of the act, limited only to the determination of exemption under Section 10B of the Act. The claim of depreciation, though part of the record, was not disturbed.
• A notice u/s 148 was issued on 03.03.2009, one month for the expiry of six years from the end of the relevant assessment year. The assessee reiterated the original return and the reason for re- assessment was the claim of 60% depreciation on computer software. The assessee objected both to the assumption of jurisdiction and to the reopening on merits. The objections were overruled and an assessment order under Section 143(3) read with Section 147 was passed on 25.11.2009.
• The department claimed that the claim of depreciation at the rate of 60% was incorrect and that the claim to be allowed only to extent of 25%. pursuant to the amendment in the depreciation rates. The assessee succeeded both in first and second appeal, before the CIT(A) and the ITAT, both holding that the reopening was barred by limitation as full and true disclosure had been made.
• The appellant stated that the assessee would be entitled to higher rate of depreciation only pursuant to the amendment to the depreciation schedule, effective AY 2003 – 04 onwards. The appellant also pointed out that the order of assessment passed on 05.09.2007 consequent upon the order of revision by the CIT would give rise to a fresh period of limitation.
• The respondents relied upon the tax audit reports for AY 2001–02 to demonstrate consistency in claiming depreciation on computer software made in terms of the entry in the Depreciation Schedule provisions relating to ‘computer’ as there had been no separate entry in respect of ‘computer software’. It was also submitted that the assessment was a scrutiny assessment, and therefore the claim had already been examined by the Assessing Officer.

ISSUE:

• Whether on the facts and in the circumstances of the case, the ITAT was right in holding that reopening of the assessment was not proper and quashed the assessment proceedings?
• Whether on the facts and in the circumstances of the case, depreciation on computer software is to be allowed at 25% especially when the amendment laying down the rate of depreciation on computer software @ 60% was prospective in nature and is applicable from the Assessment year 2003 – 04?

OBSERVATIONS:

• The Hon’ble High court placed its reliance on Hon’ble Delhi High Court Judgement of CIT v Kelvinator of India Ltd. ((256 ITR )1) wherein it was held that a quasi-judicial authority is presumed to have acted properly under Section 114(e) of the Evidence Act and Such a presumption would arise in the present case as well. The Hon’ble High Court noted that the return of income filed by the assessee was full and complete, and he basis of re-assessment is only the return of income filed by the assessee, accompanied by financials, including the depreciation statement.
• The proviso to Section 147 makes it clear that the extended period of limitation can be invoked only when there is omission or failure on the part of the assessee to make full and true disclosure, which was not the case before the Hon’ble Court. The Hon’ble High Court therefore concurred with the Hon’ble Tribunal that the assumption of jurisdiction itself was barred by limitation.
• The Hon’ble High Court rejected the Revenue’s contention that limitation should be calculated from the assessment order dated 05.09.2007 passed pursuant to Section 263 revision and held that the revision under Section 263 was confined only to computation of exemption under Section 10A/10B, and the issue of depreciation was not the subject matter of such revision. There was no merger of the original assessment order dated 17.03.2005 with the revised order insofar as depreciation was concerned. Accordingly, the argument of the Revenue that limitation must be computed from 05.09.2007 was rejected, and issue 1 was answered in favour of the assessee.
• On the issue of rate of depreciation on computer software the Hon’ble High Court said prior to the amendment applicable from AY 2003–04, the relevant entry invoked by the assessee was Item (2B) of Part A of the depreciation schedule relating to “computers” eligible for depreciation at 60%. The audit report revealed that the assessee had been consistently claiming depreciation at 60% on computer software, and no objection had been raised by the Department in earlier years.
• The Hon’ble High Court further noted that there was no specific entry for computer software prior to AY 2003–04, and therefore there was nothing improper in the assessee availing depreciation at 60% based on the existing entry and ruled in favour of the assessee. Hence the present appeal was dismissed and both substantial questions of law were answered in favour of the assessee.