Brief of the Case
In the case of Coperion Ideal Private Limited v. CIT, Delhi High Court while giving the decision in the favour of the assessee, held that there should be some tangible material available with the Revenue, whenever they want to conclude that Assessee have escaped Assessment.
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 showed expenditure of a sum of Rs.20,71,489 under the head “Royalty & Cess”. The, ACIT issued a notice u/s 154 of the Act to the Assessee seeking explanation on the ground that there was mistake apparent from the record since the aforesaid amount should have been treated as capital expenditure as the benefit was of enduring nature. In the reply it was mentioned that it had been paying royalty for the previous 5-6 years based on the turnover and in all those years it has been allowed as a revenue expenditure. It appears that an audit objection was raised, in response to which the ACIT wrote to the Senior Audit Officer on 28th October 2005, clarifying that the expenditure was rightly treated as revenue expenditure. On 24th March 2009, more than four years after the assessment was completed, the ACIT reopened the assessment by relying on the Judgment of Hon’ble Supreme Court in the case of Southern Switchgears Ltd. vs. CIT, 232 ITR 359 that grant of technical aid fees for setting up factory and right to sell the products as per collaboration agreement is not allowable as revenue expenditure and was to be treated as capital expenditure. As per that decision the said expenditure was not allowable. Therefore, the income to the tune of Rs 1973337/- has escaped assessment because of failure on part of assessee to disclose fully and truly material facts necessary for Assessment and hence notice u/s 148 is issued for reopening u/s 147 of the IT Act. The appeal of the Assessee was allowed by the CIT(A) but was reversed by the Hon’ble Tribunal.
Contentions of the Revenue
The ld. Counsel for the Revenue contended that in the case of ALA Firm v. CIT (1991) 189 ITR 285 (SC), there were 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.
Judgment of the Hon’ble High Court
The Hon’ble High Court held that there are at least two reasons why the decision in ALA Firm (supra) 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.
Then the Hon’ble High Court by taking into consideration the amendments, observed that prior to 1st April 1989, in order to reopen an assessment the AO ought to have had reason to believe that the income of the Assessee has escaped assessment on account of the omission or failure by the Assessee to file a return or to disclose fully and truly all material facts necessary for assessment for that year. After the amendment the only requirement as far as Section 147 (1) is concerned is that the AO should have reason to believe that the income of the Assessee has escaped assessment. The Hon’ble High Court relied on the Judgment of the Hon’ble Supreme Court in CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC) where it was 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, the Hon’ble High Court relied on its own recent decision in ITA No. 356 of 2013 (Commissioner of Income Tax II v. Multiplex Trading & Industrial Co. Ltd.) where it was held that where reopening of assessment was sought to be made four years after the expiry of the original assessment, 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.
Therefore, by relying on the above mentioned Judgments, it was held by the Hon’ble High Court that the threshold requirement that the AO should, on the basis of some tangible material, conclude that there was escapement of income on account of the Assessee and failing to disclose material particulars, is not fulfilled in the present case.
Hence, the appeal of the assessee was allowed.