IBM INDIA PRIVATE LIMITED,BENGALURU vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 3(1)(1), BENGALURU

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No. 584/Bang/2020 Assessment Year : 2006-07 M/s. IBM India Pvt. Ltd., The Assistant No. 12, Subramanya Commissioner of Arcade, Income-tax, Bannerghatta Road, Circle 3 (1)(1), Bangalore – 560 029. Bangalore. Vs. PAN: AAACI4403L APPELLANT RESPONDENT Assessee by : Shri Ajay Rotti, CA : Shri Priyadarshi Mishra, Revenue by Addl. CIT (DR) Date of Hearing : 29-03-2022 Date of Pronouncement : 13-06-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against order dated 16.03.2020 passed by Ld.CIT(A)-12, Bangalore for A.Y. 2006-07 on following grounds of appeal. “The grounds stated hereunder are independent of and without prejudice to one another. The Appellant submits as under: 1. Order bad in law 1.1. On the facts and circumstances of the case and in law, the order under section 250 of the Income-tax Act, 1961 (the Act') dated March 16, 2020 passed by the learned Commissioner of Income-tax (Appeals) - 12, Bangalore ['CIT(A)'], upholding the order passed under

Page 2 of 19 ITA No. 584/Bang/2020 section 147 read with section 143(3) of the Act, be struck down as invalid. as the order is bad in law and on facts. 2. Lack of jurisdiction to initiate action under section 147 of the Act 2.1. The learned CIT(A) has erred in upholding the validity of the reassessment proceedings and failed to appreciate that the proceedings initiated under section 147 of the Act are invalid, unlawful and grossly without jurisdiction, as pre-conditions prescribed in law were not satisfied. 2.2. The learned CIT(A) has erred in law, in upholding the initiation of the reassessment proceedings by the learned Assessing Officer ('AO') by disregarding the settled positions of law. 2.3. The learned CIT(A) has erred in not appreciating that the learned AO has failed to substantiate the test of "reason to believe" which is sin qua non for initiating the reassessment proceedings. 2.4. The learned CIT(A) has erred in concluding that there was new tangible material noticed and that there was no change in opinion by the learned AO. 2.5. The Learned CIT(A) has erred in law and on facts in upholding the action of the learned AO in exercising jurisdiction under section 147 after 4 years have elapsed from the relevant AY in spite of the fact that the Appellant has fully and truly disclosed all material facts relevant to the assessment under section 143(3) of the Act. 2.6. The Learned CIT(A), AO has erred in law and on facts, by not appreciating that no income has escaped assessment on the original issue (for which notice was issued) and accordingly, additions cannot be made for additional issues. 2.7. The learned CIT(A) has erred in law and on facts in upholding the actions of the learned AO that the first proviso to section 147 of the Act does not apply and there can be no restrictions in verifying additional issues (Club membership and Write-off of advances) given that the reopening (on the original issue) happened within 4 years of the relevant AY. In doing so. the learned CIT(A) has failed to appreciate that the word 'no action' in the first proviso to section 147 is to be read to include the act of reassessing additional issues (not included in the original notice). 3. Deductibility of sales tax paid on sale of PC division 3.1 The learned CIT(A) has erred in law and on facts, in upholding the learned AO's action of treating the sales tax

Page 3 of 19 ITA No. 584/Bang/2020 paid as capital expenditure in spite of the fact that the payment did not result in creation of an asset or an advantage of enduring nature. 3.2 The learned CIT(A) has erred in law and on facts in failing to appreciate that section 50B is a self-contained code which provides for a deduction of net worth of the undertaking and not sales tax paid. 4. Payments to clubs for membership and subscription expenses 4.1 The learned CIT(A) has erred in law and on facts in disallowing club membership and subscription expenses as being capital in nature without giving cognizance to the supportings furnished by the Appellant. 4.2. The learned CIT(A) has erred in law in disregarding the decision of the Hon'ble jurisdictional Tribunal in the Appellant's own case for AY 2008-09 allowing such expenses. 5. Write off of advances and loans 5.1. The learned CIT(A) has erred in law and on facts by not treating the write off of loans and advances provided to employees (which subsequently become irrecoverable) as write off of debts receivable under section 36(1)(vii). 5.2. Without prejudice to the above, the learned CIT(A) has erred in law and on facts by not treating the same as a loss incidental to carrying on the business of the Appellant which is to be allowed under section 29 of the Act. 5.3. The learned CIT(A) has erred in law and on facts in not appreciating the settled position that non-recovery of employee's advance were directly linked with the business of the Appellant and therefore, it was in the nature of business loss allowable under Section 28 of the Act. 6. Initiation of Penalty Proceedings 6.1. The learned CIT(A) has erred in upholding the learned AO's action in initiating penalty proceedings under section 271 of the Act. 7. Relief 7.1. The Appellant prays that directions be given to grant all such relief arising from the preceding grounds as also all reliefs consequential thereto. 7.2. The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, at any time before or during the hearing of the appeal.”

Page 4 of 19 ITA No. 584/Bang/2020 2. Brief facts of the case are as under: 2.1 The assessee is into business of providing of information technology products and services and export of software services, trading activities-trading and leasing of company’s products. 2.2 For the year under consideration, assessee filed its return of income on 30.11.2006 declaring total income of Rs.138,33,26,054/-. The return was processed under scrutiny and statutory notices were issued in response to which the representatives of assessee appeared before the Ld.AO and filed requisite details as called for. 2.3 As assessee was involved in international transactions, reference was made u/s. 92CA to the Ld.TPO. The Ld.TPO proposed transfer pricing adjustment to the ALP of assessee to the extent of Rs.264,24,78,755/-. Against the draft assessment order, assessee raised objections before the DRP and after the DRP directions, the TP adjustment was revised to Rs.262,46,21,532/-. The Ld.AO also computed a disallowance u/s. 10A amounting to Rs.203,19,41,646/-. The disallowance towards provision of warranty was also made to an extent of Rs.27,14,09,000/-. 2.4 The Ld.AO observed that assessee had debited Rs.99,36,12,000/- to the profit and loss account as software expenses. The Ld.AO treated it as capital expenditure and granted depreciation on the same at 60%. The Ld.AO observed that assessee claimed deduction in respect of royalty payments made to IBM World Trade Corporation amounting to Rs.77,57,91,935/- in connection to purchase of software against which no TDS was effectuated. The said amount was disallowed by the Ld.AO u/s. 40(a)(i) which was upheld by the DRP. The Ld.AO observed that

Page 5 of 19 ITA No. 584/Bang/2020 assessee had claimed provision for obsolescence amounting to Rs.4,96,52,000/- which was disallowed. Thus the total addition made by the Ld.AO in the final assessment order including the transfer pricing adjustment was Rs.819,41,87,426/-. Against this addition, an appeal has been preferred before this Tribunal which is pending. 2.5 Subsequently, the Ld.AO passed an order u/s. 154 rectifying certain mistakes that were apparent on record. The Ld.AO passed an order dated 2 Feb 2011 under section 154 rectifying certain mistakes which were apparent from record. Subsequently, the Ld.AO vide notice dated 15.04.2011 issued notice u/s. 148 of the Act reopened the assessment. The Ld.AO issued a notice dated 01/03/2011 under section 148 of the Act and reopened the assessment proceedings under section 147 of the Act. The stated reason for reopening the assessment was that an amount of INR 1,40,21,000 incurred as sales tax paid on account of divesture of its computing division was wrongly claimed as revenue expenditure. The assessee filed Writ Petition before Hon’ble Karnataka High Court in WP 26188 of 2011 challenging the notice issued under section 148 of the Act. The Hon'ble Court disposed off the WP by permitting the assessee to file objections to the notice issued under section 148 of the Act, while reserving the liberty to question the final outcome of the proceedings pursuant to the notice. It is submitted that, while the above WP was before the Hon'ble Court, the assessee opted out of the LTU Scheme, with effect from 01/04/2013 by filing intimation letter dated 28/02/2013. However, the assessee’s request was kept in abeyance by referring to certain ongoing proceedings under the Act.

Page 6 of 19 ITA No. 584/Bang/2020 Aggrieved by the same, the assessee filed Writ Petition before the Hon'ble Karnataka High Court which in WP 17293 of 2013. The Hon'ble Karnataka High Court passed interim order on 24/04/2013, staying all pending proceedings before the LTU in Writ Appeal 3013 of 2013 in connection to WP 17293 of 2013. It is submitted that the stay granted was effective from 24/04/2013 to 04/06/2013. When WP 17293 of 2013 was disposed off, the Chief Commissioner was directed to pass necessary orders. The Chief Commissioner passed the order granting exit from 01/04/2014 and the assessee filed WP 49075 of 2013 against the order. The High Court stayed the operation of the Chief Commissioner's order on 30/10/2013. The assessee also filed Writ Petition before the Hon'ble Karnataka High Court against the reassessment proceedings for the subject AY in WP 42722 of 2013. The Hon'ble Karnataka High Court granted interim stay on the reassessment order vide order dated 20/09/2013, further extended on 12/12/2013 and tagged along with the WP 49075 of 2013. The stay granted in case of WP 49075 of 2013 was vacated by the Hon'ble Karnataka High Court vide its order dated 11/04/2014. In the interest of timely completion of the assessments without any loss to the revenue, the assessee filed memo with the court to withdraw WP 49075 of 2013 and WP 42722 of 2013, and the Hon'ble Karnataka High Court has dismissed the WPs on 18/07/2016. The Ld.AO issued notice under section 142(1) on 31/08/2016. Submissions were filed by the assessee and order dated 15/09/2016 under section 147 was passed reassessing the income of the assessee. Thereafter, an application for rectification was filed by the assessee and after due consideration, the Ld.AO passed order under

Page 7 of 19 ITA No. 584/Bang/2020 section 154, to rectify mistakes apparent from record. Consequent to the order, the demand payable by the assessee was computed at INR 2,28,65,607. 2.6 Aggrieved by the order of the Ld.AO dated 15.09.2016, assessee preferred appeal before Ld.CIT(A). 2.7 Before the Ld.CIT(A), assessee challenged the reopening of the assessment for having lack of jurisdiction. It was alleged that there was no fresh material that came to the notice of the Ld.AO subsequent to the passing of the assessment order in order to trigger the provisions of section 147. On merits, the Ld.AR submitted various arguments which were not considered by the Ld.CIT(A). The Ld.CIT(A) dismissed the appeal of assessee entirely. 2.8 Aggrieved by the order of Ld.CIT(A), assessee filed present appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that Ground no. 2 raised by assessee is legal ground that, goes to the root cause of the present assessment. He submitted that following were the reasons recorded in the notice dated 01.03.2011 wherein it is merely stated that income of assessee for A.Y. 2006-07 has escaped assessment within the meaning of section 147 of the Act. He placed reliance on pages 203-205 of the paper book, wherein the said notice is placed. For the sake of convenience, the same is scanned and reproduced herewith.

Page 8 of 19 ITA No. 584/Bang/2020

Page 9 of 19 ITA No. 584/Bang/2020

Page 10 of 19 ITA No. 584/Bang/2020

Page 11 of 19 ITA No. 584/Bang/2020 reported in (2002) 123 Taxman 433. The Ld.AR relied on the following observations of the above decision. “21. Another aspect of the matter also cannot be lost sight of. A statute conferring an arbitrary power may be held to be ultra vires Article 14 of the Constitution of India. If two interpretations are possible, the interpretation which upholds constitutionality, it is trite, should be favored. In the event it is held that by reason of Section 147 if ITO exercises its jurisdiction for initiating a proceeding for re- assessment only upon mere change of opinion, the same may be held to be unconstitutional. We are therefore of the opinion that Section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate re-assessment proceeding upon his mere change of opinion. We, however, may hasten to add that if "reason to believe" of the assessing Officer if founded on an information which might have been received by the Assessing Officer after the completion of assessment, it may be a sound foundation for exercising the power under Section 147 read with Section 148 of the Act. 22. We are unable to agree with the submission of Mr. Jolly to the effect that the impugned order of reassessment cannot be faulted as the same was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessed. It is one thing to say that the Assessing Officer had received information from an audit report which was not before the ITO, but it is another thing to say that such information can be derived by the material which had been supplied by the assessed himself. 23. We also cannot accept submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded on analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under Section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of Sub-section (1) of Section 143 or Sub-section (3) of Section 143. When a regular order of assessment is passed in terms of the said Sub-section (3) of Section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of Clause (e) of Section 114 of the Indian Evidence Act the judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without anything

Page 12 of 19 ITA No. 584/Bang/2020 further, the same would amount to giving premium to an authority exercising quasi judicial function to take benefit of its own wrong. For the reasons afore-mentioned we are of the opinion that answer to the question raised before this Bench must be rendered in the affirmative, i.e. in favor of the assessed and against the Revenue. No order as to costs.” 7. On the contrary, the Ld.CIT.DR submitted that the arguments advanced by the Ld.AR is of no assistance because the issue considered by the Ld.AO in the reasons recorded has not been verified during the original assessment proceedings. The Ld.DR also referred and relied on the decision of Hon’ble Supreme Court in case of CIT vs. Kelvinator of India Ltd. reported in (2010) 187 Taxman 312 wherein Hon’ble Court observed as under. “3. To answer the above question, we need to note the changes undergone by Section 147 of the Income Tax Act, 1961 [for short, "the Act"]. Prior to Direct Tax Laws (Amendment) Act, 1987, Section 147 reads as under: "Income escaping assessment. 147. If-- [a] the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or [b] notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income- tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year)."[Emphasis supplied] 3.1 After enactment of Direct Tax Laws (Amendment) Act, 1987, i.e., prior to 1st April, 1989, Section 147 of the Act, reads as under: "147. Income escaping assessment.-- If the Assessing Officer, for reasons to be recorded by him in writing, is

Page 13 of 19 ITA No. 584/Bang/2020 of the opinion that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year)." [Emphasis supplied] 3.2 After the Amending Act, 1989, Section 147 reads as under: "Income escaping assessment. 147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year)." [Emphasis supplied] 4. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-

Page 14 of 19 ITA No. 584/Bang/2020 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. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words "reason to believe", Parliament re-introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows: "7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression `reason to believe' in Section 147.-A number of representations were received against the omission of the words `reason to believe' from Section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, `reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression `has reason to believe' in place of the words `for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same."[Emphasis supplied] 5. For the afore-stated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs.” 8. The Ld.CIT.DR thus submitted that the two conditions for reopening of an assessment as observed by Hon’ble Supreme Court

Page 15 of 19 ITA No. 584/Bang/2020 hereinabove would confer jurisdiction on the Ld.AO to reopen an assessment. 9. Referring to the present facts of the case, the Ld.CIT.DR submitted that the issue in respect of sale of its division by assessee as a going concern for a lump sum consideration has not been verified and considered by the Ld.AO. He placed reliance on Explanation 1 to section 147 of the Act. He submitted that in order to examine this claim, the assessment was reopened without raising any other issue which already formed part of original assessment. The Ld.CIT.DR thus submitted that there is no violation of whatsoever nature in reopening of the assessment. He thus supported the reopening of the assessment for the year under consideration. 10. We have perused the submissions advanced by both sides in the light of records placed before us. 11. We note that, the basis of the re-assessment is the alleged claim of expenditure relating to alleged transfer of capital asset from business income has not been verified by the Ld.AO in the original assessment proceedings. 12. The provisions of Section 147 prescribe limitation of four years, extended to six years for issuance of notice under section 147 of the Act. Admittedly, for year under consideration, the notice is issued within the period of 4 years. In order to hold the jurisdiction to issue notice under section 147 to be valid, there must be non disclosure of material facts, that is necessary to compute the correct income in the hands of the assessee. Explanation 1 to Section 147, relied on by the revenue, reads as follows:

Page 16 of 19 ITA No. 584/Bang/2020 Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not, necessarily amount to disclosure within the meaning of the foregoing proviso. 13. There can be no doubt that, the duty of disclosing all the primary facts relevant to the decision of the question before the Ld.AO, lies on the assessee. To meet the possible contention that, when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Ld.AO might have discovered, the Legislature has put in the Explanation 1 to the section 147 of the Act. The position, therefore, is that, if there were in fact some reasonable grounds to think that, there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of "under-assessment", that would be sufficient to give jurisdiction to the Ld.AO to issue the notices under section 147 of the Act. In the present facts, the sale of assessee’s business as a going concern formed part of the Notes to the Accounts. Schedule 19 para 21(a) reads as under: “The Company has incurred Rs.14,021(000) being sales tax paid on account of divesture which is included in the rates andtaxes under operating and other expenses(Refer Schedule 17)” 14. The above note in no manner discloses the material fact that assessee sold one of its division as a going concern for lumpsum consideration. The manner in which the assessee dealt with such materials and evidences for the purpose of filing of return of income is of paramount importance to form an opinion, whether,

Page 17 of 19 ITA No. 584/Bang/2020 the assessee has satisfied the condition of disclosing fully and truly all material facts, necessary for the assessment. Hon’ble High Courts have held that, any narrow interpretation in this regard undoubtedly will defeat the very purpose and object of the reopening proceedings contemplated under section147 of the Act. Fully and truly cannot be seen with naked eyes, but it is to be seen through tax lens. Thus, "truly and fully" would not fall under the literal dictionary meaning and the word 'fully and truly' connotes the technical and contextual meaning, so as to inject life to the purpose and object of the reopening proceedings under section147 of the Act. 15. No doubt, change of opinion is a ground to set aside the reopening of assessment. However, what amounts to change of opinion, must be dealt with carefully, based on the conditions stipulated under Section147. The deemed situations under Explanation 2, are to be looked into, for the purpose of examining the issue of change of opinion. In the present facts of the case the Ld.AO in the original assessment proceedings did not consider the issue of sale of one of the assessee’s division as a going concern for a lumpsum consideration. Subsequently, the Revenue was able to trace out the under assessment, that the expenditure claimed by the assessee led to excessive relief under the Income-tax Act. Thus the case of the assessee very clearly falls under the deemed cases, where income chargeable to tax has escaped assessment, and such under assessment and the excess relief or excess allowance or otherwise would be falling under the condition that the petitioner has failed to disclose fully and truly. Therefore, in our view the argument advanced by the Ld.AR that

Page 18 of 19 ITA No. 584/Bang/2020 the notice issued under section 147 of the Act cannot be considered to be on change of opinion, since the issue was never verified by the Ld.AO during the original proceedings. We are therefore of the opinion that the Ld.AO rightly initiated the reassessment proceeding under such facts and circumstances of the present case. Accordingly, we do not find any merit in the Ground 2.5 of the assessee and the same is dismissed. 16. On merits, we note that the assessee could not produce documents called for by the Ld.CIT(A) on the issues alleged. In the interest of justice we remand the issues back to the Ld.CIT(A) granting opportunity to the assessee for producing necessary documents in support of the claim. The Ld.CIT(A) is directed to consider the evidences filed and decide the issues on merits de nove by granting proper opportunity of being heard to the assessee. Accordingly, Grounds 3-6 raised by assessee stands allowed for statistical purposes. In the result the appeal filed by the assessee stands partly allowed for statistical purposes. Order pronounced in open court on 13th June, 2022.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 13th June, 2022. /MS /

Page 19 of 19 ITA No. 584/Bang/2020 Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, ITAT, Bangalore