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Assessment Year : 2004-05. M/s. RELX India Pvt. Ltd., Deputy Commissioner [Formerly M/s.Reed Elsevier India P.Ltd., Vs. of Income Tax, 14th Floor, Building 10, Tower: B, Circle : 15 (1), DLF Cyber City Complex, N e w D e l h i. DLF City Phase – II, Gurgaon – 122 002 [Haryana]. PAN : AAACR 4727 J (Appellant) (Respondents) Assessee by : Shri S. D. Kapila, Adv.; & Shri R. R. Maurya, Adv.; Department by : Shri F. R. Meena, Sr. D. R.; Date of Hearing : 22.03.2017 Date of Pronouncement: 08.06.2017 O R D E R. PER I. C. SUDHIR, J. M. :
The assessee has questioned first appellate order on the following ground :-
“ 1. That on the facts and the circumstances of the case and in law the ld. CIT (Appeals) erred in holding that the reassessment order passed by the Assessing Officer is not bad in law; 2. That on the facts and the circumstances of the case and in law, the ld. CIT (Appeals) erred in upholding the validity of the issuance of notice under section 148 and consequent impugned re-assessment; 3. That on the facts and the circumstances of the case and in law, the ld. CIT (Appeals) erred in sustaining disallowance under section 40(a)(i) of the Act of Rs.77.28 lakhs, being royalty paid to Indian-resident authors prior to July 13, 2006. ”
Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
The relevant facts of the case are that assessee had filed its return of income at ‘NIL’ on 1.11.2004 after claiming brought forward losses of Rs.6,81,12,313/-, which was processed under section 143(1) of the Act. On 31.03.2006 the assessee filed a revised return vide acknowledgement No.171100080, declaring ‘NIL’ income i.e. after claiming brought forward losses of Rs.7,21,75,213/- under the regular provisions of the Act and Rs.5,04,27,079/- under the MAT provisions. Original assessment was framed on 21.12.2006 at ‘NIL’ income after allowing brought forward losses of Rs.6,82,12,313/-. Book profit under section 115JB was shown at Rs.5,04,27,079/-. Later on, proceeding under section 147 of the Act was initiated after recording reasons to believe and notice under section 148 of the Act dated 30.03.2011 was issued. The assessee adopted its return filed on 31.03.2006 has filed in compliance of notice under section 148 of the Act. The assessee, however, also raised objections against the validity of initiation of reopening proceedings. The Assessing Officer rejected the same and made disallowance of Rs.231.69 lakhs under section 40(a)(i) and (ia) of the Act. The ld. CIT (Appeals) did not agree with the contention of the assessee against the validity of initiation of reopening proceedings. He, however, confined the disallowance with this finding that the assessee was liable to deduct TDS on payment of Rs.77.28 lakhs to the Indian authors. On the submission of the assessee that it has deducted TDS on the amount of Rs.154.41 lakhs paid to M/s. Associated Enterprises under section 195 amounting to Rs.23.16 lakhs, the ld. CIT (Appeals) directed the Assessing Officer to verify the TDS payment and if paid, allow deduction of royalty payment, if otherwise admissible. Before the Tribunal, the assessee has questioned the action of the ld. CIT (Appeals) in sustaining the disallowance made under section 40(a)(i) of the Act of Rs.77.28 lakhs being royalty paid to Indian resident authors prior to July13. 2006. The assessee has also question the action of the ld. CIT (Appeals) in upholding the validity of issuance of notice under section 148 of the Act and the consequent reassessment.
Ground No. 1 is general in nature, hence does not need independent adjudication.
Ground No. 2 : In this ground the assessee has questioned the validity of issuance of notice under section 148 of the Act and the reassessment framed in furtherance thereto. In support of this ground, the ld. AR submitted that assessee is a publisher of books and royalty was paid to authors. The assessment for the assessment year under consideration was framed under section 143(1) of the Act on 21.12.2006, accepting the claim of the assessee and no disallowance in question under section 40(a)(i) / (ia) was made. Later on, notice under section 148 was issued on 30.03.2011 and assessment under section 147/143(3) of the Act has been framed making the disallowance in question on 16.12.2011. He contended that the reopening of the assessment has been initiated after expiry of the 4 years from the end of the relevant assessment year that too without having any new material after the framing of assessment under section 143(3) of the Act, thus it is a case of change of opinion, which cannot be the basis for initiation of reopening proceedings. In support he referred page Nos. 20 to 51 of the paper book filed by the assessee i.e. copy of the tax audit report (Form 3CD) for the year ended 31.03.2004. He drew our attention especially on page No. 25 of the paper book i.e. the part of the Form No. 3CD wherein against the column No. (f) “amount inadmissible under section 40(a)” it has been reported that amount inadmissible under section 40(a) is Rs.38,01,600/- on account of non- deduction of TDS on interest accrued on Reed Elsevier UK Loan. The ld. AR submitted that as per the first proviso to section 147 of the Act, where an assessment or reassessment has been framed under section 143(3) or section 147 of the Act, no action shall be taken by an Assessing Officer under the section 147 after the expiry of 4 years from the end of the relevant assessment year where, there is no failure on the part of the assessee to make a return under section 139, 142(1) or 148 of the Act and all the material facts necessary for assessment has been disclosed by the assessee fully and truly. The ld. AR submitted that all these requirements have been complied with by the assessee, hence, initiation of reopening in the present case in view of first proviso to section 147 of the Act is not valid. He submitted that all the material facts necessary for assessment were fully and truly disclosed by way of filing various submissions and documents during the course of assessment, more importantly the balance sheet, profit and loss account along with the notes thereon and tax audit report in Form No. 3CD. These facts also get support from the “reasons to belief”. On perusal of reasons it clearly emerges that the belief has not been formed on the basis of some new tangible material rather it is based on the scrutiny of old assessment records and documents submitted earlier as reason Nos. 1 and 2 are based on the verification of tax audit report and reason No. 3 is based upon the verification of profit and loss account. In support the ld. AR placed reliance on the following decisions :-
(i) Phoolchand Banjaranglal (1993) 203 ITR 456 (SC); (ii) CIT Vs. A. R. Enterprises (2002) 255 ITR 121 (Raj.); (iii) Oriental Carpet Manufacturers (India) Ltd. Vs. ITO 168 ITR 296 (P & H); (iv) Calcutta Discount Co. Ltd. Vs. ITO (1961) 41 ITR 191 (SC); (v) CIT Vs. Shri Tirath Ram Ahuja (HUF) 306 ITR 175 (Del.); (vi) Haryana Acrylic Manufacturing Co.
175 Taxman 262 (Del.); (vii) Mahavir Spinning Mills Ltd. Vs. CIT 270 ITR 290 (P & H). (viii) Munjal Showa Ltd. Vs. DCIT (2016) 382 ITR 555 (Del).
5.1 The ld. AR also referred CBDT Circular No. 549 dated 31.10.1989 reported in 182 ITR (St.) 1, 29.
5.2 The ld. AR submitted further that even on merits (Ground No.3) the assessee has got very sound case as section 194J which covers TDS on fees paid for profession or technical services to residents was amended with effect from 13.7.2006 when the word “royalty” was introduced, therefore, the assessee was under no obligation to deduct and deposit TDS on the payment of Rs.77.28 lakhs to Indian authors. In support, he placed reliance on the decision of Hon’ble Madras High Court in the case of CIT Vs. Barmag AG, West Germany, (2005) 272 ITR 603 (Mad.).
5.3 The ld. Sr. DR, on the other hand, placed reliance on the orders of the authorities below. He submitted that there was escapement of assessment of taxable income, hence, the Assessing Officer was justified in initiating reopening proceedings after recording reasons to believe and taking approval of the competent authority.
5.4 Considering the above submission as well as having gone through the decisions cited above, there is no dispute that as per first proviso to section 147 of the Act, no action can be taken under section 147 of the Act after expiry of 4 years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under section 142(1) or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year. When we examine the facts of the present case, in view of this established proposition of law supported by the ratio laid down in the above cited decisions, we find that an assessment under section 143(3) was already framed and there was no failure on the part of the assessee to file a return under section 139, 142(1) or 148 of the Act. And besides, all the material facts necessary for the assessment were fully and truly disclosed by way of filing various submissions and documents during the course of assessment, which included the balance sheet, profit and loss account along with notes thereon and tax audit report in Form No. 3CD. And above all, on perusal of reasons, it is evident that belief has not been formed by the Assessing Officer on the basis of some new tangible material rather it is based on the scrutiny of old assessment records and documents submitted earlier. For a ready reference, the reasons recorded by the Assessing Officer, which is also part of the assessment order, are being reproduced hereunder :-
“ The assessment of M/s Reed Elsevier India P. Ltd. for the year 2004-05 was completed after scrutiny in December, 2006 at nil income after setting off brought forward losses and assessed at a book profit of Rs.5,04,27,079/-. After verifying the 3CD report, Column 27(a) & (b) the TDS on the royalty payment of made outside India is not deducted. Therefore, the royalty payment of Rs.1,53,96,123/- should have been added back to the taxable income of the assessee.
Section 40(a) of the Income Tax Act, 1961 provides that where in any financial r the assessee has paid any interest, royalty fees for technical services or °r sum chargeable under this act which is payable outside India on which tax ot been paid or deducted such amount should not be allowed as deducted while computing the income chargeable under the head "profits and gains of business or profession.
As per section 40(a) of the Income Tax Act,1961 any amount / expenditure payable as interest, royalty, fees for technical services outside India, if tax is not deducted at source and such tax has not been deducted or after deduction such tax has not been paid to the Govt. during the previous year, such expenses are disallowed under the section.
The mistake resulted in under assessment of income by Rs. 1.53,96,123/-
Further, as per 3CD report Rs.38,01,600/- shown under the column 17(f) were inadmissible under section 40(a) on account of non- deduction of TDS as interest accrued on Reed Elsevier, UK loan. This amount should have been added back by the department.
The mistake resulted in underassessment of income and excess carry forward of losses of Rs.38,01,600/-.
Further, the assessee had debited Rs.231.69 lakh to profit and loss account on account of royalty paid to a foreign company for use of intangible property such as knowhow, patents, copyright, licenses etc. Section 37 of the Income tax Act,1961 provides that any expenditure not being in the nature of capital expenditure of the assessee laid out or expanded wholly or exclusively for the purposes of business, is allowable as deduction in computation of the income chargeable under the head "profit and gains of business or profession". Further, section 32 of the income tax Act,1961 w.e.f. 01.04.1998 provides that know-how, patents, copyright, trademarks, licenses, franchises or any other business or commercial rights of similar nature are intangible assets and depreciation at the rate of 25 percent is allowable on these intangible assets. As the expenditure was capital in nature, Rs.173.77 lakh after allowing depreciation at the rate of 25 percent should have been disallowed. The mistake resulted in under assessment of income of Rs.173.77 lakh. ”
5.5 The very reading of the above reasons make it clear that reason Nos. 1 and 2 are based on the verification of tax audit report furnished in Form No. 3CD and reason No. 3 is based upon the verification of profit and loss account. The Hon’ble Supreme Court in the case of Phoolchand Banjaranglal (supra) has been pleased to hold as under :-
“ for issuance of notice after 4 years in respect of scrutiny cases, the Assessing Officer issuing the notice must hold the belief that due to the omission or failure on the part of the assessee to disclose fully or timely all material facts necessary for the assessment, income in fact has escaped assessment. If the assessee has from time to time disclosed fully and truly all material facts as required by the Assessing Officer at the time of the assessment and that these facts had not been disputed by the Assessing Officer under section 147 of the act that escapement of income chargeable to tax was due to failure on the part of the assessee to disclose fully and truly all material facts will not exist and will take the case out of purview of the proviso.
Thus, the proviso to section 147 of the act casts exemplary burden of meeting additional conditions. ”
5.6 The Hon’ble High Court of Delhi in the case of Munjal Showa Ltd. Vs. DCIT has also been pleased to hold similar view. The Hon’ble jurisdictional High Court of Punjab & Haryana in the case of Oriental Carpet Manufacturers (India) Ltd. Vs. ITO (supra) has been pleased to hold that it is practically settled position of law that “material facts” used in section 147 of the Act refer only to primary facts which have been disclosed by the assessee showing the sale, purchase and profit supported by the account books. As such, in absence of any case of suppression, misrepresentation or falsification of documents, it cannot be said that the provisions of section 147 of the Act are attracted. We thus, respectfully following the ratio laid down in the above cited decisions by the ld. AR, hold that initiation of reopening proceedings in the present case, is barred by limitation as per first proviso to section 147 of the Act. It was nothing, but change of opinion by the Assessing Officer as well. Consequently, the initiation of reopening proceedings and the reassessment framed in furtherance thereto are held as null and void and are accordingly quashed. The ground No. 2 is thus allowed.
In view of the above finding, on the validity of reassessment itself, the remaining ground No. 3 does not survive and it is being disposed off as such.
In result, the appeal is allowed.
The order is pronounced in the Open Court on : 08th June, 2017.