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2015 (5) TMI 189 - GUJARAT HIGH COURT

2015 (5) TMI 189 - GUJARAT HIGH COURT - [2016] 380 ITR 449 - Reopening of assessment - beyond the period of 4 years - “Software License Fees” paid to the foreign companies was in nature of “Royalty” and thus, “Capital Expenditure” and therefore, it attracts section 195 of the Income Tax Act and therefore payment made without withholding of tax at source - also the assessee had not fulfilled the conditions for eligibility of deduction u/s 10B & the deduction was not in order - Held that:- It is r .....

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lso directed to furnish relevant documentary evidences to establish and prove that “Software License Fees” is in nature of revenue. The assessee submitted complete details of “Software License Fees” and justified its claim that the “Software License Fees” is in the nature of revenue expenditure and not capital expenditure. Only thereafter the Assessing Officer while framing the assessment, treated the payment of “Software License Fees” made to the Foreign Companies as revenue expenditure and all .....

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o disclose fully and truly all material facts. Under the circumstances, the condition precedent for invoking powers under section 147 of the Income Tax Act to initiate reassessment proceedings beyond the period of 4 years are not at all satisfied. See Niko Resources Ltd. Versus Assistant Director of Income Tax,(2014 (9) TMI 892 - GUJARAT HIGH COURT) as well as Gujarat Lease Financing Limited (2013 (10) TMI 101 - GUJARAT HIGH COURT) - impugned notice u/s 148 is hereby quashed - Decided in favour .....

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A.Y. 2007-2008. Thus, the petitioner has challenged reopening proceedings of the assessment for A.Y. 2008-2009 initiated in exercise of powers under section 147 of the Income Tax Act. 2.00. Facts leading to the present Special Civil Application in nutshell are as under :- 2.01. That the petitioner is a Company engaged in I.T. Enabled Services and Software Development. The petitioner has filed its return of income for A.Y. 2008-2009 declaring total income at ₹ 52,78,610/-. 2.02. That the ca .....

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143(3) of the Income Tax Act on 9/12/2011, making several additions to income under various heads of the income of the assessee. 2.04. That thereafter beyond the period of four years of the concerned assessment year, the assessing officer has issued the impugned notice under section 148 of the Income Tax Act on 27/3/2014 reopening the assessment for the A.Y. 2008-2009. 2.05. That on receiving the notice, the assessee requested for the reasons recorded for reassessment the assessment vide letter .....

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years, was not valid. The assessee also raised various objections on merits also. 2.07. That vide communication / letter dated 16/9/2014, the Assessing Officer disposed of the objections raised by the petitioner assessee against the reopening of the assessment. Hence, the petitioner has preferred present Special Civil Application under Article 226 of the Constitution of India challenging the impugned reassessment proceedings for the A.Y. 2008-2009. 3.00. Mr.B.S. Soparkar, learned advocate appea .....

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half of the petitioner - assessee has further submitted that in the present case, as such there is/ was no failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment. It is submitted that all details of payment for Software License Fees were duly provided as and when sought and/or required by the Assessing Officer and the same was scrutinized by the Assessing Officer. It is submitted that therefore, now having allowed the claim, it is not open to .....

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raised at all with respect to Tax Deducted at Source ( TDS for short) deducted on the Software License Fees. It is submitted that thereafter when the Assessing Officer passed the assessment order and that as such there was no failure on the part assessee to disclose fully and truly all material facts, the initiation of reassessment proceedings on the reasons recorded, is absolutely invalid, illegal and without jurisdiction and more particularly, the condition precedent for initiation of the rea .....

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itted that on perusal of the reasons supplied, it appears that reopening for the issue of deduction under section 10(B) is made due to the decision of the Delhi High Court in the case of Commissioner of Income Tax Versus Regency Creations Limited, reported in [2012] 27 taxmann.com 322 (Delhi). It is submitted that reopening of the assessment, on the basis of the decision of any Court after expiry of four years from the relevant assessment year, is not justified merely because court pronounced th .....

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titioner assessee had obtained relevant approval of the Development Commissioner and the same was submitted to the Assessing Officer during the assessment and hence the petitioner was entitled to deduction under section 10(B) of the Income Tax Act. It is submitted that therefore, initiation of reassessment proceedings on the reasons recorded is absolutely illegal and invalid. 3.05. Mr.B.S. Soparkar, learned advocate appearing on behalf of the petitioner - assessee has heavily relied upon the dec .....

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come Tax, Circle-IV, Ahmedabad dated 24/6/2013 passed in Special Civil Application No. 3048 in support of his submissions that the initiation of the impugned reassessment proceedings are absolutely illegal and without jurisdiction. 4.00. Present petition is opposed by Mr.M.R. Bhatt, learned counsel appearing on behalf of the revenue. 4.01. An Affidavit-in-reply is filed on behalf of the respondent justifying the reopening of the assessment for the A.Y. 2008-2009, in exercise of powers under sect .....

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al as per the provisions of the Act. Therefore, it is requested not to entertain the present petition. 4.03. On merits, Mr.M.R. Bhatt, learned counsel appearing on behalf of the revenue has vehemently submitted that the impugned reassessment proceedings are absolutely just and proper and in accordance with the provisions of the Act, more particularly section 147 read with section 148 of the Income Tax Act. 4.04. Mr.M.R. Bhatt, learned counsel appearing on behalf of the revenue has further submit .....

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e under section 148 of the Income Tax Act has been lawfully issued. 4.05. Mr.M.R. Bhatt, learned counsel appearing on behalf of the revenue has further submitted that even with respect to deduction claimed under section 10(B) to the tune of ₹ 4,69,56,816/- , it was found that the assessee Company had not obtained approval of the Board as hundred per cent export oriented for deduction under section 10(B) of the Income Tax Act and despite the same, claimed deduction under section 10(B) of th .....

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submitted that opinion can only be formed on the issues which are disclosed and thereafter considered. It is submitted that in the present case, payment in nature of royalty was not disclosed by the assessee. It is submitted that though foreign remittance was in nature of royalty, on which tax was to be deducted at source, the assessee failed to do so. 4.07. Mr.M.R. Bhatt, learned counsel appearing on behalf of the revenue has further submitted that in the present case deduction of TDS under se .....

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or an amount of ₹ 22,56,752/- and claimed the same as revenue expenditure. It is submitted that the payment was made to the foreign companies without withholding the tax at source though the payment was exclusively in the nature of Royalty . 4.08. Mr.M.R. Bhatt, learned counsel appearing on behalf of the revenue has further submitted that the assessee company simply availed the Software Services from the foreign companies and these Companies granted the assessee company only right to use S .....

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ull facts. It is submitted that therefore initiation of opening of the assessment and initiation of the reassessment proceedings are absolutely just and proper and in accordance with the provisions of law, more particularly section 147 read with section 148 of the Income Tax Act. Submitting accordingly it is requested to dismiss the present Special Civil Application. 5.00. Heard the learned advocates appearing on behalf of the respective parties at length. 5.01. At the outset, it is required to .....

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nd found that the income has escaped assessment due to the failure on the part of the assessee to disclose truly and fully all material facts for the assessment, the Assessing Officer is not authorized to make reassessment even in the event of his having reasonable belief that any income chargeable to tax has escaped assessment for any assessment year. As per the first proviso to section 147, assessment can be reopened under section 147 after expiry of 4 years only if (1) assessee failed to make .....

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on or failure on the part of the assessee to disclose truly and fully all material facts, initiation of reassessment proceedings beyond the period of 4 years is not permission and shall be wholly without jurisdiction. 5.02. Now, in the backdrop of the above legal provisions, challenge to the impugned reassessment proceedings are required to be considered. 5.03. In the present case, reassessment proceedings under section 147 of the Income Tax for the A.Y. 2008-2009 are initiated beyond the period .....

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ssee s contention of being consideration of expenditure as revenue , has been accepted. It has been noted that the payment was made without withholding of tax at source though the payment is exclusively in nature of royalty . Assessee Company has simply availed software services from M/s.Megrna Design Automation Inc, USA. Magma has granted the company the only right to use software license purchased from Magma the software was owned by Magma Design and is protected by Copyright laws of USA. 2.1. .....

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2008-09 an order u/s.201(1) & 201(1A) r.w.s.195 of the Act dated :2/12/2011 was passed wherein remittance to the tune of ₹ 23,07,240/- to one M/s. Magma Design Automation Inc., USA was considered. This resulted into demand of ₹ 3,61,463/-, which is paid by the assessee company and even its appeal was dismissed by the C1T(A). 3. Further, to state that the deduction u/s 108 of the IT Act, 1961 is available to newly established hundred percent export-oriented undertakings subject to .....

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undertaking from the Board appointed in this behalf by the Central Government is the first and foremost condition for eligibility u/s 10B of the Act. 3.1. Verification of assessment records revealed that the assessee had not received approval of the Board for the above units. For KASEZ unit, approval had been obtained from the Development Commissioner, Kandla Special Economic Zone and in respect of Pune Unit, approval had been obtained from, Director, Software Technology Park of lndta, Pune Inf .....

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the assessee had not fulfilled the conditions for eligibility of deduction u/s 10B of the Act, the deduction of ₹ 4,69,56,816/- was not in order. The irregular deduction claimed resulted in under-assessment of ₹ 4,69,56,816/- 4. Accordingly, I have reason to believe that income to the tune of ₹ 4,69,56,816/- chargeable to tax has been under- assessed in the case of the assessee M/s.E-Infochips Ltd. for the Assessment Year 2008-09 and is required to be reassessed as there was fa .....

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Capital Expenditure and therefore, it attracts section 195 of the Income Tax Act and therefore, TDS was required to be deducted. However, it is required to be noted that in the original assessment, full particulars with respect to Software License Fees by the assessee to the foreign companies was disclosed. Not only that the assessee claimed the same as revenue expenditure. The notice was issued under section 143(3) of the Act and the Assessing Officer also vide communication / notice dated 28/7 .....

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as under:- 5. Details of proportionate Disallowance u/s.10B:- Sir, please note that the amount of deduction claimed u/s 10B has been correctly worked out as per Section 10B(4). The profit of each undertaking is separately worked out and accordingly as per Section 10B(4), the deduction is claimed in proportion of Export turnover of undertaking vis-a-vis Total Turnover of Undertaking. The deduction is claimed as per Audit Report in Form 56G. 6. Explanation for Software License Fees Debited to P &a .....

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(B) of the Income Tax Act. 5.05. Now, subsequently on reopening of the assessment, it is the case of the Assessing Officer that the payment of Software License Fees is in the nature of royalty and thus in the nature of Capital Expenditure, as the assesses has simply availed the Software Services from the named foreign companies and the said foreign companies have granted the the assessee company the only right to use Software License as the Software was owned by the parent company itself and als .....

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to deduction claimed under sec.10(B) of the Act, and therefore, the income chargeable to tax has been escaped due to the failure on the part of the assessee to disclose fully and truly all material facts. Under the circumstances, the condition precedent for invoking powers under section 147 of the Income Tax Act to initiate reassessment proceedings beyond the period of 4 years are not at all satisfied. 5.07. Identical question came to be considered by the Division Bench of this Court in the case .....

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reasonable belief that any income chargeable to tax has escaped assessment for any assessment year. As per the 1st proviso to section 147 of the Act, assessment can be reopened under section I47 of the Act after expiry of 4 years only if (1) the assessee failed to make a return under section I39 of the Act or in response to notice issued under section 142(1) or under section 148 of the Act, he failed to disclose truly and fully all material facts necessary for the assessment. Once all primary f .....

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relevant assessment year would be without any jurisdiction and bad in law, if all material facts are furnished and there remained no omission or failure on the part of the assessee to disclose truly and fully all material facts. This Court, after extensively discussing law on the issue in case of Gujarat Lease Financing Ltd. (supra), has held thus: "l0. It can be clearly noted from the reasons recorded that there is no mention at all of the assessee having not disclosed fully or truly mate .....

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amply clear that the Assessing Officer, who is authorized to issue notice under section 148 of the Act for reassessment. on his having a reason to believe that income chargeable to tax had escaped assessment for any assessment year, can assess or reassess such income and also any such other income chargeable to tax, which has escaped the assessment. However, no such action is permissible after lapse of 4 years from the end of the relevant assessment year unless income chargeable to tax has escap .....

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