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Before: Shri Amit Shukla & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the assessee against the order of ld. CIT(A)- VIII, New Delhi dated 27.09.2010 for the assessment year 2002-03 on the following grounds :
1. That on the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not holding that the assessment completed under section 147 of the Income-tax Act, 1961 ("the Act") was bad in law and void ab initio.
2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not holding that the reassessment proceedings were based on mere change of opinion and, therefore, were unlawful and liable to be quashed. 2.1 That on the facts and in the circumstances of the case and in law, the proceedings under section 147 of the Act were initiated beyond limitation of 4 years from the end of the relevant assessment year in terms of the proviso to section 147 of the Act and were, therefore, barred by limitation and liable to be quashed.
ITA No. 5268/Del./2010 2 2.2 That on the facts and circumstances of the case and in law, there being no failure on the part of appellant to disclose fully and truly all material facts necessary for assessment, the reassessment proceedings initiated after 4 years from the end of the relevant assessment year were illegal and bad in law and the impugned order is, therefore, liable to be quashed.
3. That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining disallowance to the extent of 25% of payment of royalty amounting to Rs.38,45,56,962 paid to KONINKLIJKE PHILLIPS ELECTRONICS N.V. and Rs. 57,22,008 to Nissai Sangyo (Singapore) PTE Ltd. holding the same to be partly on capital account.
4. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that a part of the payment made in terms of agreement with KONINKLUKE PHILLIPS ELECTRONICS N.V. was towards technical assistance, know-how obtained in order to put the production facility ready for production.
5. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that the payment to Nissai Sangyo (Singapore) Pte Ltd. was in terms of article 3 of the agreement dated 30-06-2001 between Mitsubishi Chemical Corporation, Nissai Sangyo (Singapore) Pte. Ltd. and, therefore, the same was capital in nature.
The brief facts of the case are that the assessment of the assessee company was completed u/s. 143(3) of the IT Act on 28.07.2008, whereby the claim of assessee made u/s. 37(1) with respect to allowance of capital expenditure by way of payment of Royalty of Rs.39,57,72,326/- paid to foreign Company in lieu of technical know how/acquiring patent rights and depreciation of Rs.1,12,43,106/- on fixed assets were allowed. However, subsequently, the Assessing Officer having noticed the decision of Hon’ble Supreme Court in the case of Southern Switchgears Ltd. v. CIT[1998] 232 ITR
ITA No. 5268/Del./2010 3 359 (SC), reopened the case of assessee u/s. 148/147 of the Act after recording the following reasons : 01. Incorrect allowance of Capital Expenditure: It is seen from records that an amount of Rs. 39,57,72,326 has been debited to P&L account as royalty paid to a foreign company in lieu of technical Know-how/acquiring patent rights from them, which was in the nature of enduring advantage to the assessee. Hon'ble Supreme Court has held in a judgement in the case of Southern Switch-Gear Ltd vs CIT 232 ITR 359 dated 11.12.97 that the grant of technical aid fees for setting up factory and right to sell the products as per collaboration agreement is not" allowable as 100% revenue expenditure and was to be treated as 25% capital expenditure. Hence, out of the royalty of Rs. 39,57,72,326 paid by the assessee, Rs. 9,89,43,082 was capital in nature and not allowable.
2. Incorrect allowance of Depreciation It is seen from records that an amount of Rs. 1,12,43,106 (Rs. 1,11,72,852 + 70,255) was claimed as depreciation on plant and machinery amounting to Rs. 4,45,91,411 and Rs. 5,62,039, which was put to use on 1.7.02 and 5.10.02 respectively. As the plant and machinery was put to use after the end of previous year, the depreciation claimed was not allowable. In view of the above, I have reasons to believe that income of Rs. 11,01,86,188/-, which is chargeable to tax has escaped assessment. Accordingly, reassessment proceedings are initiated under section 147 of the Income Tax Act, 1961 for A.Y. 2002-03. Since more than four years have expired from the end of relevant assessment year, necessary approval of the Ld. Commissioner of Income Tax, Delhi-II required as per proviso to section 151(1) of the Act has been taken for issue of notice under section 148 of the Act.”
Thus, based on the above reasons and adhering to the above decision of Hon’ble Supreme Court, the Assessing Officer disallowed 25% of the total Royalty payment amounting to Rs.39,57,72,326/- vide reassessment order. In appeal, the ld. CIT(A) upheld the action of the Assessing Officer vide impugned
ITA No. 5268/Del./2010 4 order, which has been challenged by the assessee by way of present appeal before the Tribunal.
The learned AR at the outset of hearing submitted that the Assessing Officer is not justified to reopen the case u/s. 147/148 after a period of four years because the assessment was made u/s. 143(3) when all the materials were declared fully and truly necessary for assessment. There is no new tangible material found by the Assessing Officer to reopen the assessment. The judicial precedent in the case of Southern Switch Gear, which led the Assessing Officer to reopen the case was decided by Hon’ble Supreme Court on 11.12.1997, i.e., much before the original assessment was made by the Assessing Officer. Therefore, the reopening of assessment on this basis beyond the period of limitation of four years is not sustainable being based on change of opinion. The ld. AR also relied on the following judgments : (i). Coperion Ideal Private Limited vs. CIT, 378 ITR 525 (Del) (ii). Xerox Modicorp Limited vs. DCIT, 350 ITR 308(Del) (iii). CIT vs. Viniyas Finance and Investment Pvt. Ltd., 357 ITR 646.
He further submitted that in assessee’s own case for the assessment year 2005-06, the coordinate bench of Tribunal had accepted that the payment made for technical knowhow is royalty payment to IP owners. He, therefore, submitted that the ld. Authorities below are not justified to initiate reassessment proceedings against the assessee and to make and sustain the impugned additions.
On the other hand, the ld. DR relied on the order of the lower authorities and submitted that the Assessing Officer has rightly reopened the case and has ITA No. 5268/Del./2010 5 rightly made the impugned order after relying on the decision of Hon’ble Supreme Court in the case of Southern Switch Gear Ltd. (supra).
After hearing both the sides and perusing the entire material available on record and the orders of the authorities below, we find that the assessment u/s. 143(3) was made for the impugned assessment year and the Assessing Officer issued notice dated 27.03.20009 u/s. 148 on the basis of judgment of Hon’ble Supreme Court in the case of Southern Switch Gear Ltd. (supra). This decision was rendered by Hon’ble Apex Court on 11.12.1997, i.e., much before the original assessment order was passed by the Assessing Officer. Based on these facts, the contention of the assessee has been that no new tangible material was available with the Assessing Officer to acquire legally valid jurisdiction for reopening the completed assessment. Moreover, it is not in dispute that the impugned reassessment has been made after four years for which it is it is incumbent upon the Assessing Officer that the belief of escapement of income was due to the failure on the part of assessee to disclose all material facts necessary for assessment. The Assessing Officer was also required to satisfy that there was tangible material in his possession to reopen the case of the assessee. The material, which led the Assessing Officer to reopen the assessment of assessee was the decision of Hon’ble Apex Court in the case of Southern Switchgears Ltd. vs. CIT(supra). In the identical circumstances, Hon’ble jurisdictional High Court in the case of Coperion Ideal (P) Ltd. (supra), has held as under :
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
ITA No. 5268/Del./2010 6 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[1998] 232 ITR 359 (SC), which was rendered by the Supreme Court several years earlier on 11th December, 1997 was not noticed by the A.O. at the time of finalization of assessment at the first instance on 31st January, 2005 under Section 143(3) of the Act.
In light of the legal position after the amendment to Section 147 of the Act, as explained in Kelvinator India Ltd. (supra], the Court is of the view that, in a case where the assessment is sought to be reopened in 2009, four years after it was originally made, i.e. 2005, 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, 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 Kelvinator India Ltd. (supra), The threshold requirement of 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 in the facts of the present case, not justified.”
In the case of assessee also, the technical know-how payment was allowed u/s. 37(1) in the original assessment proceedings, but later on, the Assessing Officer changed his opinion only on the basis of Hon’ble Supreme Court’s judgment in the case of Southern Switchgears Ltd. v. CIT (supra), which had been rendered on 11.12.1997, i.e., much before the original assessment was passed and thus, in view of the above decision of Hon’ble Jurisdictional High Court, no new tangible materials were there with the Assessing Officer for reopening of the assessment. Thus, respectfully following the judgment of Hon’ble Jurisdictional High Court, we quash the reopening of ITA No. 5268/Del./2010 7 assessment. Accordingly, the proceedings u/s. 147 are quashed being invalid and the consequential reassessment, thus, becomes void.
Once, in view of our above findings, the reassessment made by the Assessing Officer stands quashed on legal aspects of the case, we need not to adjudicate upon the arguments advanced and case laws cited on the merits of additions, as the same become academic in nature.