Delhi High Court held In the case of Coperion Ideal Pvt. Ltd. vs. CIT that threshold requirement of re-opening of assessment that the AO should, on the basis of some tangible material, conclude that there was escapement of income on account of the Assessee failing to disclose material particulars, is not fulfilled in the present case. Consequently, the reopening of the assessment was not justified. The mere fact that there was a judgment of the Supreme Court of 1997 which was not noticed by the AO when he framed the original assessment cannot per se constitute the only material on the basis of which the assessment could have been reopened.
Facts of the Case
The Assessee filed its return of income for the AY 2002-03 on 31st October 2002 declaring income at Rs.67,91,500. The Assessee’s case was selected for scrutiny & an order was passed on 31st January 2005 under Section 143(3), assessing the income at Rs.71,46,170. One of the items of expenditure was a sum of Rs.20,71,489 under the head “Royalty & Cess”. On 5th September 2005, the ACIT issued a notice under Section 154 to the Assessee seeking explanation on the ground that there was mistake apparent from the record since the amount paid for royalty & cess should have been treated as capital expenditure as the benefit was of enduring nature. The Assessee replied to this notice on 21st September 2005 clarifying the issue. On 30th March 2009, more than four years after the assessment was completed, the ACIT issued notice to the Assessee under Section 148 seeking to reopen the assessment for AY 2002-03 on the ground that as per supreme court decision, royalty amount is capital expenditure and not allowable. The Assessee’s objections to the reopening were rejected and a fresh order of assessment was passed on 30th November 2009. The amount of Rs.19,73,337 on account of royalty was added to the income of the Assessee and initiation of penalty proceedings was directed.
Contention of the Revenue
The ld counsel of the revenue placed reliance on the decision of the Supreme Court in ALA Firm v. CIT (1991) 189 ITR 285 (SC) to urge that in similar circumstances where the AO had overlooked a binding precedent on the issue, it was construed as a sufficient material to justify reopening of the assessment.
Held by CIT (A)
CIT (A) allowed the appeal of the assessee and allowed the royalty payment as allowable expenditure.
Held by ITAT
ITAT allowed the appeal of the revenue and disallowed the expenditure.
Held by High Court
There are at least two reasons why the decision in ALA Firm v. CIT (1991) 189 ITR 285 (SC) would not be applicable in the facts of the present case. In the first place, it is apparent that the said decision was not in the context of reopening of assessment sought to be made four years after the expiry of the relevant assessment year of the original assessment. The reopening was done not very long after the initial assessment. Secondly, the decision was rendered in respect of Section 147 of the Act as it stood prior to its amendment with effect from 1st April 1989.
The Supreme Court in CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC) has held that, even in terms of the amended Section 147 there has to be some tangible material for an AO to have reason to believe that income has escaped assessment. The Supreme Court emphasised that although the power to reopen is much wider after the amendment, the words “reason to believe” needed a schematic interpretation and that the AO ought not be given power to reopen the assessment on the basis of a mere change of opinion. It was emphasised that “re-assessment has to be based on fulfilment of certain pre-condition and if the concept of ‘change of opinion’ is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of ‘change of opinion’ as an in-built test to check abuse of power by the Assessing Officer”.
In Haryana Acrylic Manufacturing Co. Ltd. v. CIT, 308 ITR 38 (Del.), this Court reiterated the law in relation to reopening of an assessment under Section 147/148 of the Act after the expiry of four years after the assessment year for which the original assessment was made. Recently, in its decision dated 22nd September 2015 in ITA No. 356 of 2013 (Commissioner of Income Tax II v. Multiplex Trading & Industrial Co. Ltd.) this Court, in a case where reopening of assessment was sought to be made four years after the expiry of the original assessment, held that “in order to reopen an assessment which is beyond the period of four years from the end of the relevant assessment year, the condition that there has been a failure on the part of the Assessee to truly and fully disclose all material facts must be concluded with certain level of certainty.”
In the present case, there was no failure on the part of the Assessee to disclose the material particulars with the return originally filed. On the contrary, the AO himself replied to the audit objection pointing out that royalty was allowed to be claimed as revenue expenditure by the Assessee for the years earlier to AY 2002-03. A copy of the agreement under which royalty was being paid was provided to the Revenue. The only reason for reopening the assessment was that the decision in Southern Switchgears Ltd. v. CIT 232 ITR 359, which was rendered by the Supreme Court several years earlier on 11th December 1997 was not noticed by the AO at the time of finalization of assessment at the first instance on 31st January 2005 under Section 143(3) of the Act.
The mere fact that there was a judgment of the Supreme Court of 1997 which was not noticed by the AO when he framed the original assessment cannot per se constitute the only material on the basis of which the assessment could have been reopened. When on the same material, four years after the assessment year for which the original assessment is finalised, the AO seeks to reopen the assessment on the basis of a judicial precedent delivered more than eight years earlier, it would be a case of mere ‘change of opinion’, something clearly held impermissible by CIT v. Kelvinator of India Ltd. 2010) 320 ITR 561 (SC).
Accordingly, appeal of the assessee allowed.