Reopening of completed assessments not justified in the event of true & full disclosure by assessee

Brief of the case:

The Hon’ble Delhi High Court in the case of HCL Technologies Ltd. held that completed cannot be reopened after the expiry of four years from the end of relevant assessment year unless the income escaped from tax is attributable to assessee’s failure to disclose full & true disclosure of the facts.

Facts of the case:

• The scrutiny assessment was completed under Sec 143(3) read with Sec 144C (13) on 28.10.2010. In the order of the said assessment the software license fee claimed by the assessee was allowed only to the extent of 25% (i.e. 25 % of 31.69 crores) and the remaining 75% was treated as capital assets capitalized under the block of computers on which 60% depreciation allowable. The assessee’s appeal was already pending before the ITAT challenging the original assessment order.
• The AO issued a notice under sec 148 seeking to reopen the assessment after the expiry of end of 4 years from the relevant AY. The assessment was re-opened for the reason that the software license fee is nature of intangible assets and not to form part of block of computers. Thus, the depreciation allowable only 25% and not 60%. Such excess allowance has resulted in escapement of income and to tap the same the assessment has been re-opened.
• The assessee objected to the above re-opening on the ground that since all the material facts have been disclosed during the assessment proceedings the AO cannot re-open the same in the absence of any new tangible material in the hand.

But the objections filed by the assessee was rejected by the AO. Consequently, the assessee filed a writ petition before the High Court praying to quash the order of AO.

Contention of Revenue:

• The AO had a reason to believe that the excess claim of depreciation allowed to assessee has resulted in escapement of income chargeable.
• Thus , the re-opening is justified as the AO has applied its own mind and had tangible material in hand sufficient enough to have a reason to believe that the income chargeable to tax has escaped assessment.

 Contention of the Assessee:

• The facts were truly and fully disclosed to the assessee at the time of original assessment. The AO has sought to re-open the assessment merely on the ground of change in opinion as to tax treatment of software license fees.

• The re-opening is thus, not justified as the AO has already applied his mind on the point he is seeking reassessment.

Decision of the High Court:

• The first proviso to sec 147 provides that where an assessment under sec 143(3) has been completed for the relevant AY, no action shall be taken under sec 147 after the expiry of 4years from the end of relevant AY, unless any income chargeable to tax has escaped assessment for such AY by reason of failure on the part of the assessee to disclose fully & truly the ,material facts necessary for the purpose of assessment.
  
• In the present case the assessee had made a full and true disclosure of the material facts and there is no allegation of the AO in the reasons for re-opening that the assessee did not make a full and true disclosure of the material facts at the time of the original assessment.
• The High Court following the decision its own decision in the case of Haryana Acrylic Manufacturing Co. vs. CIT held that in the present case the bar set up by the first proviso to sec 147 has not been overcomed which make the assessment bad in law.

Author’s Comments:

 Alternatively, the re-opening made by the AO could be quashed by following the decision of Full bench of Delhi HC in the case of CIT vs. Kelvinator of India Ltd. wherein the HC concluded that a mere change in opinion as to tax treatment of any matter(s) does not empower AO to reopen the assessment as the change in opinion in no way constitute a “reason to believe that income chargeable to tax has escaped the assessment.”