2025 (7) TMI 526 - HC - Income Tax

Reassessment proceedings - reasons to believe - allegation of non disclosure of material facts - allowability of non compete fee - Non-recurring expenditure claimed by the petitioner - correlation between the revenue expense of Rs. 10 crores claimed as non-compete fee in AY 2003-04 and the receipt of Rs. 15 crores admitted as revenue income - whether the respondent is entitled to reopen the assessment proceedings for the AY 2003-04 by invoking the power u/s 148 by seeking refuge u/s 147 explanation 2 alleging that the income chargeable to tax has escaped assessment on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment? It is the contention of the petitioner that when the respondent/AO already completed the assessment for the year 2003-04 on scrutinisation of documents which were already produced by the petitioner it is not open to the respondent/AO reopen the assessment based on the same materials which were already on record and the same is arbitrary barred by limitation and lacks jurisdiction. HELD THAT - For non-compete fees and treated the same as revenue expenditure. Respondent/AO having inferred that the expenditure is wholly revenue such a view cannot be reviewed under the guise of re-assessment unless and until the respondent/AO fullfills the requirement of first proviso to Section 147 and hence the assessment cannot be reopened and the same can be only reviewed under Section 263 of the Act. This Court is in complete agreement with the submission of the learned counsel for the petitioner. Non-recurring expenditure claimed by the petitioner in the income statement was partly utilized for purchase of licence which is capital in nature and the same cannot be claimed as a deduction as revenue expenditure during the FY 2002-03. This aspect was cleared by the petitioner by way of filing objection stating that as per the terms of the both agreements for a consideration of Rs. 7.5 crores and Rs. 2.5 crores respectively it is agreed that the CP group will not jointly or severally in any manner assist any Competitor of the petitioner-Company in carrying on or developing any specified products or business to create Competition in the Indian Market for the above covenant the petitioner-Company agreed to pay the CP groups a sum of Rs. 10 crores on 17.08.2002 the same was shown in the Annual Report for the year 2002-03 under non-recurring and exceptional items non solicitation Non compete fees and this amount was paid in terms of the two agreements on 17.08.2002 therefore the assumption of the respondent that such expenditure cannot be treated to have been incurred in the revenue field which has neither directly enhanced the profit of the assessee nor can be treated as business expenditure and thereby rejecting the petitioner s objections by disallowing the claim of Rs. 10, 00, 00, 000/- on the ground that a portion of a payment of non-compete by virtue of one of the agreement dated 17.08.2002 was capital in nature and not fully allowable as revenue expenditure and that the petitioner would receive enduring benefits by virtue of the said two agreements is also untenable. Referring to contention of respondent that the petitioner has offered Rs. 15 crore received from Atlas Copco India Ltd. as revenue income in AY 2005-06 whereas the agreement itself restricts the payment to be received only at Rs. 10 crores hence there is no strict correlation between the revenue expenses of Rs. 10 croes claimed as non-compete fee and receipt of Rs. 15 crores as revenue income in the AY 2005-06 is concerned as rightly pointed out by the learned counsel for the petitioner the receipt of Rs. 15 crore amount from Atlas Copco India Ltd. as revenue income pertains to the AY 2005-06 and the same has no nexus with reopening of the assessment for the year 2003- 04 when the facts remains that the receipt of Rs. 15 crore was accepted in the scrutiny as revenue for the AY 2004-05. Therefore as rightly contended by the learned counsel for the petitioner the respondent has grossly erred in observing that there is no strict correlation between the revenue expense of Rs. 10 crores claimed as non-compete fee in AY 2003-04 and the receipt of Rs. 15 crores admitted as revenue income in the AY 2005-06. Reasons cited by the respondent for reopening of the assessment that the brief note on the transaction dated 25.01.2005 submitted by the petitioner during the assessment proceedings does not specifically states about clause 2.4 and that particular clause is seen to be omitted and that the petitioner did not point the said aspect in the written reply and kept silence on this particular clause; that the wrongful interpretation of clause 2.4 stating that purpose of the said tripartite agreement is to confer an enduring benefits in perpetuity to the petitioner- Company by way of licence granted by CP group to the petitioner-Company and the CP also grants the petitioner-Company the right to licence to manufacture and supply the know-how to any person are untenable and the same cannot be treated as failure on the part of the petitioner to disclose the material facts fully and truly and therefore the re-assessment in terms of first proviso to Section 147 is not permissible is law inasmuch as the question of non-disclosure of the materials facts by the petitioner itself does not arise. There is no question of non-disclosure of the material facts which were already disclosed at the time of making original assessment so as to invoke section 148 of the Act by the respondent and to proceed accordingly. The petitioner has disclosed all the materials particularly the said two noncompete agreements when such being the case again based on the said two non-compete agreements reopening of the case under Section 148 of the Act is not proper and that if the respondent was not able to go through the agreements at the time of making assessment for the said negligence on the part of the AO the petitioner cannot be mulcted with any liability under the garb of re-assessment that too based on the said two agreements again. Therefore this Court holds that the respondent is not entitled to reopen the assessment proceedings for the AY 2003-04 by virtue of issuance of notice under Section 148 of the I.T.Act by seeking refuge neither under explanation 2 or first proviso to section 147 of the Act inasmuch as the specific issue was scrutinized by the respondent/AO explanation was called for which was submitted along with the relevant agreements and entire materials were disclosed and the respondent/AO himself conceded that the agreements submitted during the original assessment proceedings were gone through and completed the assessment by treating the entire expenditure as revenue expenditure therefore the question of non-disclosure itself does not arise. Hence the entire re-assessment proceedings initiated by the respondent which ultimately culminated in the impugned proceedings deserve to be quashed. Decided in favour of assessee.

Summary

The core legal question considered by the Court is whether the respondent (Assessing Officer) was entitled to reopen the assessment proceedings for the assessment year (AY) 2003-04 by invoking the power under Section 148 of the Income Tax Act, 1961 (I.T. Act), relying on Explanation 2 to Section 147, on the ground that income chargeable to tax had escaped assessment due to failure on the part of the assessee (petitioner) to disclose fully and truly all material facts necessary for assessment.

Closely related to the above is the issue of whether the reopening was barred by limitation under the first proviso to Section 147, given that the original assessment was completed after scrutiny and the petitioner had furnished all relevant documents, including two non-compete agreements dated 17.08.2002, which formed the basis of the expenditure claimed.

Another issue considered was the interpretation of clause 2.4 of the second non-compete agreement, which the respondent contended conferred an enduring benefit in perpetuity (license rights) to the petitioner, thus rendering part of the payment capital expenditure rather than revenue expenditure, and whether the petitioner had suppressed this material fact to justify reopening.

Finally, the Court examined whether the receipt of Rs. 15 crores by the petitioner in AY 2005-06 as revenue income from Atlas Copco India Ltd. had any bearing on the reopening of assessment for AY 2003-04.

Issue-wise Detailed Analysis:

1. Entitlement to Reopen Assessment under Section 148/147 on Grounds of Non-disclosure of Material Facts

Legal Framework and Precedents: Section 147 allows reopening of assessment if income chargeable to tax has escaped assessment. The first proviso to Section 147 restricts reopening beyond four years from the end of the relevant AY unless the failure to disclose fully and truly all material facts necessary for assessment is established. Explanation 2 to the second proviso to Section 147 clarifies that income escaped assessment by reason of failure to disclose fully and truly all material facts. The Supreme Court decision in CIT vs. Kelvinator of India Ltd. (320 ITR 561) was relied upon by the petitioner to argue that reopening cannot be done merely because the Assessing Officer drew an incorrect inference; reopening requires failure to disclose material facts.

Court's Interpretation and Reasoning: The Court noted that the petitioner had filed the return of income (ROI) for AY 2003-04, claiming non-compete fees paid under two agreements as revenue expenditure. The respondent/Assessing Officer had scrutinized the ROI, issued a letter dated 25.08.2004 seeking details, and the petitioner furnished copies of the two agreements along with a brief note explaining the nature of the transaction. The AO accepted the claim and passed the assessment order on 28.03.2005 treating the expenditure as revenue expenditure.

The Court emphasized that since the petitioner had disclosed all relevant agreements and material facts during the original assessment, the condition precedent for reopening under the first proviso to Section 147 was not satisfied. The reopening notice dated 01.02.2010 was therefore barred by limitation and lacked jurisdiction.

Key Evidence and Findings: The petitioner produced the two agreements and a note explaining the nature of the payment as non-compete fees for restriction periods of two and five years respectively. The AO scrutinized these documents and accepted the expenditure as revenue in the original assessment.

Application of Law to Facts: The Court held that the petitioner had discharged the duty to disclose all material facts fully and truly. The reopening could not be justified on the basis of the same materials already on record. Any error in the original assessment could only be corrected by revision under Section 263, not by reopening under Section 148.

Treatment of Competing Arguments: The respondent argued that clause 2.4 of the second agreement conferred a perpetual license and enduring benefits, which was not disclosed and thus justified reopening. The Court rejected this, holding that since the agreements were disclosed and scrutinized, the respondent's interpretation did not amount to non-disclosure by the petitioner.

Conclusion: The reopening was not permissible as the petitioner had fully disclosed material facts; the reopening notice was barred by limitation and lacked jurisdiction.

2. Interpretation of Clause 2.4 of the Second Agreement and Its Impact on Nature of Expenditure

Legal Framework and Precedents: The classification of expenditure as capital or revenue depends on the nature of the transaction and the benefits derived. Capital expenditure generally relates to acquiring enduring benefits or assets. The Court referred to the respondent's contention that clause 2.4 granted perpetual license rights, making part of the payment capital in nature.

Court's Interpretation and Reasoning: The Court observed that the petitioner had explained the payments as non-compete fees for limited periods and had disclosed the agreements to the AO during original assessment. The AO accepted the expenditure as revenue expenditure after scrutiny. The Court found no justification for reopening on the basis of a different interpretation of clause 2.4, especially when the petitioner had not concealed the agreements or the clause.

Key Evidence and Findings: The agreements and the brief note submitted by the petitioner during original assessment proceedings included clause 2.4. The respondent's contention that the petitioner kept silent on this clause was not supported by the record, which showed the agreements were produced and examined.

Application of Law to Facts: The Court held that differing interpretations of clause 2.4 do not amount to failure to disclose material facts. The petitioner's disclosure was complete. The AO's acceptance of the expenditure as revenue expenditure was a finding of fact that cannot be reopened without new material.

Treatment of Competing Arguments: The respondent argued that the petitioner's omission to highlight clause 2.4 constituted suppression. The Court rejected this, stating that the petitioner had not concealed the clause and that the AO had the documents before him.

Conclusion: The reopening based on interpretation of clause 2.4 was not justified, and the expenditure was rightly treated as revenue by the original assessment.

3. Relevance of Receipt of Rs. 15 Crores in AY 2005-06 to Reopening AY 2003-04

Legal Framework: Income and expenditure for different assessment years are distinct. The reopening of assessment for one year cannot be justified solely on the basis of transactions in a subsequent year unless there is a direct link.

Court's Interpretation and Reasoning: The Court noted that the petitioner admitted receipt of Rs. 15 crores as revenue income in AY 2005-06. The respondent contended that this receipt had no strict correlation with the Rs. 10 crores claimed as non-compete fees in AY 2003-04, justifying reopening.

Key Evidence and Findings: The agreements capped damages or compensation at Rs. 10 crores. The petitioner's admission of Rs. 15 crores in a later year was accepted in scrutiny. The Court found no nexus between the two transactions that could justify reopening the earlier assessment.

Application of Law to Facts: The Court held that the receipt in AY 2005-06 was unrelated to the expenditure claimed in AY 2003-04. Therefore, it could not form a basis for reopening the earlier assessment.

Conclusion: The receipt of Rs. 15 crores in AY 2005-06 was irrelevant to the reopening of AY 2003-04 assessment and did not justify the reopening.

Significant Holdings:

"The respondent is not entitled to reopen the assessment proceedings for the AY 2003-04 by virtue of issuance of notice under Section 148 of the I.T.Act by seeking refuge neither under explanation 2 or first proviso to section 147 of the Act, inasmuch as, the specific issue was scrutinized by the respondent/AO, explanation was called for which was submitted along with the relevant agreements, and entire materials were disclosed and the respondent/AO himself conceded that the agreements submitted during the original assessment proceedings were gone through and completed the assessment by treating the entire expenditure as revenue expenditure, therefore, the question of non-disclosure itself does not arise." (Para 23)

"Had the petitioner not disclosed those agreements to the Assessing Officer concerned and concealed the same, in such case, the respondent can have a case for reopening of the assessment under Section 148." (Para 21)

"If at all, the AO has drawn a wrong inference, the only recourse available to the AO to set right the same is by review in the assessment under Section 263 of the Act, and the same is not permissible by invoking section 148 of the Act, by seeking refuge under Section 147." (Para 15)

"The reopening notice dated 01.02.2010 was therefore barred by limitation and lacked jurisdiction." (Para 17)

"The receipt of Rs. 15 crore amount from Atlas Copco India Ltd., as revenue income pertains to the AY 2005-06, and the same has no nexus with reopening of the assessment for the year 2003-04." (Para 19)

Core principles established include:

• The reopening of assessment under Section 148/147 requires failure to disclose fully and truly all material facts; mere difference of opinion or wrong inference on disclosed facts is insufficient.
• Once the original assessment is completed after scrutiny and all relevant documents and facts are disclosed, reopening beyond four years is barred unless suppression or non-disclosure is shown.
• Errors or incorrect inferences in original assessment are to be corrected by revision under Section 263, not by reopening under Section 148.
• Reopening cannot be based on facts or income relating to a different assessment year without direct nexus.

Final determinations on each issue are that the reopening of assessment for AY 2003-04 was not justified, was barred by limitation, lacked jurisdiction, and was quashed. The petitioner had fully disclosed all material facts and documents, and the AO had accepted the expenditure as revenue expenditure after scrutiny. The respondent's contention based on clause 2.4 of the second agreement and the receipt of Rs. 15 crores in a later year were insufficient to justify reopening. The petitioner's objections were rightly upheld by the Court, and the impugned order rejecting the objections was set aside.