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2015 (4) TMI 376 - BOMBAY HIGH COURT

2015 (4) TMI 376 - BOMBAY HIGH COURT - TMI - Reopening of assessment - expenses under the head "management fees" undisclosed - Held that:- There was no failure to disclose material facts and failure to place a version favourable to the Revenue cannot be a reason to reopen the assessment. The conclusion that the Assessing Officer never applied his mind on this issue and therefore change of opinion is not the basis on which the assessment is sought to be reopened cannot be sustained. In the light .....

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the fact that the Assessing Officer has applied his mind to the expenditure debited to the profit and loss account and not disallowed it. The facts and which are taken from the director's report itself would indicate that the Assessee had disclosed what was relevant and necessary for the purpose of making assessment. The Assessee did not hold back any document nor failed to supply any information in addition to the explanation given by it in writing concerning the said management fees expens .....

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ejveer Singh appearing for the Respondents, upon service of notice, informed the Court that the Respondents do not wish to file any affidavit and admit the factual statements and assertions in the Writ Petition that by consent Rule is made returnable forthwith. 3. The Writ Petition is directed against the notice dated 30th March, 2014 (Annexure 'J') and the order dated 26th February, 2015 (Annexure 'M') and the Petitioner prays that the same be quashed and set aside, after due sc .....

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ed order rejecting the Petitioner/Assessee's objections to the reopening of the assessment for the assessment year 2007-08. The third Respondent is Union of India. 5. For the above assessment year, return of income was filed electronically on 31st October, 2007 declaring loss of ₹ 13,13,16,597/-. The case was selected for scrutiny by the Assessing Officer. The notice under section 142(1) of the Income Tax Act, 1961 (for short the "IT Act") was issued on 16th July, 2009. The P .....

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for financial year 200607. The scrutiny assessment was undertaken and completed. The order in that behalf was passed on 24th August, 2009 (Annexure 'D'). 7. The Petitioner states that subsequently on 11th October, 2010, a departmental audit party raised certain queries in relation to the payments made to TRX Inc. The audit query was based on reexamination of the assessment record itself. According to the Petitioner, no new facts or additional material had been disclosed. The Petitioner r .....

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legedly capital in nature. A detailed reply was filed to this notice by the Petitioner on 10th July, 2012 (Annexure 'I'). The Petitioner hoped that with this reply/clarification, the matter must have been closed by the Revenue. However, impugned notice was issued dated 30th March, 2014 (Annexure 'J'). That notice was received only on 2nd April, 2014. The reasons recorded for reopening were supplied on demand by letter dated 9th February, 2015 (Annexure 'K'). 9. It is the .....

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y the order dated 26th February, 2015 (Annexure 'M'). 10. This Writ Petition impugns and challenges the above and on various grounds. 11. Mr. Naniwadekar, learned Counsel appearing for the Petitioner submits that since the assessment is sought to be reopened after more than four years and to be precise nearly six years, then, the matter falls within the first proviso to section 147. In that, the requirement is of the Assessee having allegedly failed to disclose material facts truly and f .....

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nature of the product is a precondition to determine whether the expenditure is capital. According to the Revenue, the expenditure is incurred in connection with procurement of the US contact centers which is obviously an capital asset. The expenditure of management fees is incurred with a view to bring into existence an asset for the enduring benefit of the business. In the circumstances, the Assessee did not disclose all material facts at the time of assessment and therefore, the income charg .....

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2007 discloses the management fees. It refers to the figures for the year ended 31st March, 2007 and year ended 31st March, 2006. Then, Mr. Naniwadekar invites our attention to page 57 of the paper book to submit that there were complete details which were provided under the heading US contact center acquisition. How the payments were accounted for has been truly and fully disclosed. Beyond this, there is no requirement in law and the Assessee cannot be expected also to indicate as to how this .....

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ention is also invited to a para of the director's report at page 31. Mr. Naniwadekar submits that Respondent No. 2 copies the features of the acquisition of U. S. centers and as contained in this director's report. Based on all this, no reopening is permissible is the submission of Mr. Naniwadekar. He relied upon the two Judgments delivered by this Court, one in the case of Bombay Stock Exchange Ltd. vs. Deputy Director of Income Tax (Exemption) and Ors. reported in (2014) 365 ITR 160. .....

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n change of opinion as no new material, tangible or otherwise, has been relied upon, then, that is impermissible in law. Mr.Naniwadekar emphasizes that in this Judgment, the same view taken by the Division Bench earlier has been reiterated, namely that the Assessing Officer has not set out in the reasons which fact or other material was not disclosed by the Assessee that led to income escaping. If the conclusion is based on material already supplied and before the Assessing Officer, then, the re .....

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reasons in time in this case and the officer has clearly opined as to how the income has escaped assessment for non disclosure of true and material facts, then, this is not a case for interference in Writ Jurisdiction. The view of the Revenue cannot be termed as perverse or vitiated by non application of mind or any error of law apparent on the face of the record. This Court must, therefore, allow the Revenue to take further steps in accordance with the notice and the reasons. The order recordin .....

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anks or tick mark whatever is applicable. We would highly appreciate if the department draws a notice not in this format, but something by which it would be clear in indicating to the Assessee as to why section 147 of the IT Act has been resorted to. The notice at page 142 reads as under: "NOTICE UNDER SECTION 148 OF THE INCOME TAX ACT, 1961 No. PN/DCIT Circle 1(2)/148/201314/ Office of the Dy. Commissioner of IncomeTax, Circle1(2), PMT Building, 2nd floor, Room No. 204, Swargate, Pune-4110 .....

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d I hereby require you to deliver to me within 30 days from the date of service of this notice, a return in the prescribed form of your income for the said assessment year. (Vipul Waghmare) Dy. Commissioner of Income Tax Circle 1(2), Pune." 15. Assuming that the reasons can be supplied, provided the Assessee demands the same, what is imperative is that they should be recorded. In the present case, on 9th January, 2015, the Petitioner/ Assessee may have applied for supplying of the reasons f .....

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th March, 2014 ought to conform with section 147 and what is provided in the first proviso. That enables reopening of the assessment after the expiry of four years, if the 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 of the IT Act or in response to a notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his .....

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viso." 17. A perusal thereof would indicate as to how 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 foregoing proviso. Thus, production of books and other evidence from which material evidence could be discovered with due diligence is not what is sufficient. The Assessee must disclose fully and truly .....

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of ₹ 13,13,16,597/-. The scrutiny assessment has been completed on 14.12.2009 accepting the loss. On going through the profit and loss account it is noticed that the assessee has debited ₹ 984.80 lakhs as management fees. Further, it was noticed from the notes of accounts that the assessee has paid the management fees under the shared service agreement for acquisition of two US contact center from TRX Inc., USA. The Assessee has taken over the business along with the employees and th .....

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on with procurement of the US contact centers which is obviously an capital asset. The expenditure of management fees is incurred with a view to bring into existence on assets for the enduring benefit of the business. The assessee did not disclose all material facts at the time of assessment. There is failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment and for the at assessment year under proviso I of section 147 of IT Act. The facts re .....

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he Assessing Officer now says and on going through the profit and loss account that the Assessee has debited ₹ 984.80 lacs as management fees. The Assessing Officer himself refers to the notes of accounts and states that the Assessee has paid the management fees under shared service agreement for acquisition of two US contact centers from TRX Inc., USA. It is further alleged in the reasons itself that the Assessee has taken over the business along with employees from 1st April, 2006. This .....

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and as contained in further documents, namely, director's report, balance sheet and notes to the balance sheet have been produced. What the Revenue then expects the Petitioner/Assessee to produce has not been clarified or explained to us at all. If these are not facts and material for the purpose of assessing as to whether the loss indicated and under this head has been so suffered, then, what more is required to be produced and with the aid of which document or material should have been ind .....

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We do not see how the first sentence that the Assessee did not disclose all material facts at the time of assessment would suffice in the given circumstances. Then, there is an allegation that there is a failute on the part of the Assessee to disclose fully and truly all material facts necessary for the assessment and reference is made to the proviso. The facts regarding the issue have not been put up before the Assessing Officer while framing the assessment. 19. In reply to this, the Assessee p .....

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3 of the assessment order and the findings therein. 20. The Assessee, therefore, objected and pointed out that the reassessment is proposed but without looking into the facts and material for the purposes of the treatment given to the said expenses. The director's report and which was before the Assessing Officer as well has been referred to. In the director's report, under the head "international operations", all details as to how the acquisition was made and under what docume .....

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uary, 2015 rejecting the objections is relied upon. The said order indicates that reopening of assessment beyond four years is possible when the Assessee has not made true and full disclosure of material facts to complete the assessment. We are sorry to see such non application of mind and which is apparent. Section 147 deals with income escaping assessment. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, su .....

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are material and disclosure of which is not true and full depends upon circumstances in each case. No general rule can be laid down. However, the crucial words are "failed to disclose fully and truly all material facts". The satisfaction about this is mandated and non disclosure thereof permits resorting to the power under section 147. Thus, the principle requisite is that any income chargeable to tax has escaped assessment and for the relevant assessment year and reopening of which i .....

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able to get away by merely urging that he has produced before the Assessing Officer account books or other evidence from which material evidence could, with due diligence, be discovered by the Assessing Officer. 21. In the present case, when the Revenue alleges failure to make full and true disclosure of material facts, then, the term failure has some specific legal connotation. Here, material facts are pertaining to the expenses under the head "management fees". It is apparent that th .....

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ters. If that is known to the Revenue in this case, then, what further facts were expected to be disclosed so as to make the assessment has not been indicated. Mr.Naniwadekar is therefore right in urging that when the material facts have been disclosed and with full particulars truthfully, then, it is not enough to allege that there is a distortion of facts and as per the convenience of the Assessee. If there was distortion, then, we do not know as to how the Revenue contended before us and conc .....

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ion claimed in the profit and loss account in this regard during the course of assessment proceeding and also the Assessee showed no initiative to appraise the Assessing Officer of the actual facts is patently incorrect and inaccurate. There is no denial of the fact that when the case was selected for scrutiny, not only did the Petitioner give a detailed note on the nature of business, but with regard to every single heading in its balance sheet and profit and loss account. It produced the neces .....

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tter dated 16th July, 2009 addressed by the Assessing Officer to the Petitioner's principal officer and which calls upon the Petitioner to file a detailed note on the nature of business. It also calls upon the Petitioner to furnish certain information and balance sheet and profit and loss account along with all annexures. The corresponding figures for financial year 200506 under each heading are also called for facilitating comparison. Then, such further details, as are contained in this let .....

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