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2015 (10) TMI 952 - DELHI HIGH COURT

2015 (10) TMI 952 - DELHI HIGH COURT - [2015] 378 ITR 525 - Validity of reopening of the assessment - disallowance of royalty as revenue expenditure - decision in Southern Switchgears Ltd. v. CIT [1997 (12) TMI 105 - SUPREME Court] which was rendered by the Supreme Court several years earlier on 11th December 1997 was not noticed by the AO at the time of finalization of assessment at the first instance on 31st January 2005 under Section 143(3) - Held that:- In the present case, there was no fail .....

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ator of India Ltd. (2010 (1) TMI 11 - SUPREME COURT OF INDIA), the Court is of the view that, in a case where the assessment is sought to be reopened in 2009, four years after it was originally made, i.e. 2005, the mere fact that there was a judgment of the Supreme Court of 1997 which was not noticed by the AO when he framed the original assessment cannot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 .....

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ial particulars, is not fulfilled in the present case. Consequently, the reopening of the assessment was, in the facts of the present case, not justified. - Decided in favour of assessee. - ITA 557/2015 - Dated:- 9-10-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr. Salil Kapoor and Mr. Sumit Lalchandani, Advocates For the Respondent : Mr. N.P. Sahni, Senior Standing counsel With Mr. Nitin Gulati, Advocate ORDER 1. This appeal by the Assessee under Section 260A of the Income Ta .....

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ncome for the Assessment Year ( AY ) 2002-03 on 31st October 2002 declaring income at ₹ 67,91,500. The Assessee s case was selected for scrutiny under Section 143(1) of the Act on 24th June 2003. An order was passed on 31st January 2005 under Section 143(3), assessing the income at ₹ 71,46,170. One of the items of expenditure was a sum of ₹ 20,71,489 under the head Royalty & Cess . 5. On 5th September 2005, the Assistant Commissioner of Income Tax ( ACIT ) issued a notice u .....

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w and therefore was booked as revenue expenditure and debited to the profit and loss (P&L) account. The Assessee also pointed out that it had been paying royalty for the previous 5-6 years based on the turnover and in all those years it has been allowed as a revenue expenditure. 6. It appears that an audit objection was raised, in response to which the ACIT wrote to the Senior Audit Officer on 28th October 2005, clarifying that the expenditure was rightly treated as revenue expenditure. 7. O .....

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ing expenditure of capital nature laid out wholly or exclusively for the purpose of business is allowable as deduction in computation of the income chargeable under the head 'profit and gain of business and profession'. The Hon'ble Supreme Court had held (232 ITR 359 - Southern Switchgears Ltd. vs. CIT dated 11.12.1997) that grant of technical aid fees for setting up factory and right to sell the products as per collaboration agreement is not allowable as revenue expenditure and was .....

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to the tune of ₹ 1973337/- has escaped assessment because of failure on part of assessee to disclose fully and truly material facts necessary for asstt. and hence notice u/s 148 is hereby issued for reopening u/s 147 of the IT Act. 8. On that basis, notice was issued to the Assessee on 30th March 2009 under Section 148 of the Act seeking to reopen the assessment for AY 2002-03. The Assessee s objections to the reopening were negatived and a fresh order of assessment was passed on 30th Nove .....

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me Court in ALA Firm v. CIT (1991) 189 ITR 285 (SC) to urge that in similar circumstances where the AO had overlooked a binding precedent on the issue, it was construed as a sufficient material to justify reopening of the assessment. 11. It requires to be noticed that in ALA Firm (supra) the relevant AY was 1961-62. An item of expenditure in respect of house property was allowed as deduction on the ground that it was not assessable either as revenue or capital expenditure. When for the subsequen .....

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, that the Supreme Court held that the material which constituted information and the basis of which the assessment was reopened was the decision of the Madras High Court which had not been considered at the time of the original assessment. Accordingly, the reopening of the assessment was upheld. 12. There are at least two reasons why the decision in ALA Firm (supra) would not be applicable in the facts of the present case. In the first place, it is apparent that the said decision was not in the .....

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ril 1989, in order to reopen an assessment the AO ought to have had reason to believe that the income of the Assessee has escaped assessment on account of the omission or failure by the Assessee to file a return or to disclose fully and truly all material facts necessary for assessment for that year. After the amendment the only requirement as far as Section 147 (1) is concerned is that the AO should have reason to believe that the income of the Assessee has escaped assessment. However the provi .....

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ion 142 or section 148" or "to disclose fully and truly all material facts necessary for his assessment, for that assessment year." 14. The Supreme Court in CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC) has held that, even in terms of the amended Section 147 there has to be some tangible material for an AO to have reason to believe that income has escaped assessment. The Supreme Court emphasised that although the power to reopen is much wider after the amendment, the wor .....

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an in-built test to check abuse of power by the Assessing Officer . The Supreme Court held as under: Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. 15. In Haryana Acrylic Manufacturing Co. Ltd. v. CIT, 308 ITR 38 (Del.), this Court reiterated the law in relation to reopening of an assessment under Section 147/148 of the Act after the expiry of four .....

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ion that there has been a failure on the part of the Assessee to truly and fully disclose all material facts must be concluded with certain level of certainty. 16. 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 for the years earlier to AY 2002-03. A co .....

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