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Coperion Ideal Private Limited v. Commissioner Of Income Tax-Ii

Delhi High Court

Oct 9, 2015

Judgment

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High Court of Delhi — ITA No. 557 of 2015
Coperion Ideal Private Limited v. Commissioner of Income Tax-II (Order dated 09.10.2015)

Factual and Procedural Background

The assessee (Coperion Ideal Private Limited) filed its return of income for AY 2002-03 on 31 October 2002 declaring income of Rs. 67,91,500. The case was processed under Section 143(1) on 24 June 2003, and later selected for scrutiny. An assessment under Section 143(3) was completed on 31 January 2005 assessing income at Rs. 71,46,170. The assessment included an expenditure entry of Rs. 20,71,489 under the head "Royalty & Cess".

On 5 September 2005 the Assistant Commissioner of Income Tax (ACIT) issued a notice under Section 154 observing a possible mistake apparent from record, suggesting the royalty should have been treated as capital expenditure. The assessee replied on 21 September 2005 explaining that (a) royalty at 5% was paid on domestic sales to M/s Coperion Waeschle Co., Germany on a year-to-year basis; (b) the payment did not pertain to acquisition of technical know-how and was booked as revenue expenditure; and (c) similar treatment had been allowed in earlier years. An audit objection was raised and the ACIT responded on 28 October 2005 that the expenditure was rightly treated as revenue expenditure.

On 24 March 2009 the ACIT recorded reasons for reopening the assessment, referring to the Supreme Court decision in Southern Switchgears Ltd. v. CIT (232 ITR 359) and concluding that the royalty was of an enduring nature and therefore a capital expenditure. A notice under Section 148 was issued on 30 March 2009. The Assessing Officer reopened the assessment and, by order dated 30 November 2009, added Rs. 19,73,337 to the assessee's income and directed initiation of penalty proceedings.

The Commissioner of Income Tax (Appeals) allowed the assessee's appeal by order dated 2 July 2010. The Income Tax Appellate Tribunal (ITAT), by its order dated 26 September 2014, allowed the Revenue's appeal. The assessee filed the present appeal under Section 260A challenging the ITAT order.

Legal Issues Presented

Whether the ITAT erred in law in upholding the reopening of the assessment by the Assessing Officer under Section 147 of the Income Tax Act, 1961, in the facts of the case?

Arguments of the Parties

Appellant (Assessee) — summary of content in the record

The royalty payments were made at 5% on domestic sales to M/s Coperion Waeschle Co., Germany on a year-to-year basis and did not pertain to acquisition of technical know-how.
The payments were correctly booked as revenue expenditure and debited to the profit & loss account; similar claims had been admitted in earlier years.
A copy of the agreement under which royalty was paid was provided to the Revenue, and the Assessing Officer had previously replied to an audit objection confirming revenue treatment.
Implicitly, therefore, there was no failure to disclose material facts in the original return or assessment that would justify reopening after the four-year period.

Respondent (Revenue) — summary of content in the record

Reliance was placed on the Supreme Court decision in ALA Firm v. CIT (1991) 189 ITR 285 (SC) to argue that where an Assessing Officer had overlooked a binding precedent, that fact could constitute sufficient material to justify reopening the assessment.
The Assessing Officer invoked the decision in Southern Switchgears Ltd. v. CIT (232 ITR 359) as a basis to treat the royalty as capital expenditure and to reopen the assessment.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Southern Switchgears Ltd. v. CIT (232 ITR 359)	The Supreme Court held that grant of technical aid fees for setting up factory and the right to sell products as per collaboration agreement is not allowable as revenue expenditure and is to be treated as capital expenditure.	The Assessing Officer relied on this decision as the basis to treat the royalty as capital expenditure and to reopen the assessment. The High Court noted the decision existed but held that its mere non-consideration at the time of original assessment, when relied upon after four years, did not by itself constitute sufficient tangible material to justify reopening.
ALA Firm v. CIT (1991) 189 ITR 285 (SC)	Where an Assessing Officer had not considered a binding judicial decision at the time of the original assessment, that decision could constitute the material basis for reopening (as applied in that case under pre-amendment law).	The Revenue relied on this authority to support reopening. The Court distinguished it on two grounds: it concerned reopening soon after the original assessment (not after four years), and it arose under Section 147 as it stood prior to the 1 April 1989 amendment.
Ramachari & Co. v. CIT (1961) 41 ITR 142	Referenced in the facts of ALA Firm as the Madras High Court decision that the Assessing Officer had not considered earlier; the decision operated as the relevant judicial material in that context.	Mentioned by the Court while recounting the factual matrix of ALA Firm. The Court did not apply it directly to the present facts but used it to explain the reasoning in ALA Firm.
CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC)	After the amendment of Section 147 (post-1 April 1989) an Assessing Officer must have "tangible material" to form a reason to believe that income has escaped assessment; reopening cannot be based on mere change of opinion.	The High Court relied on this Supreme Court authority as the guiding principle: reopening after four years requires tangible material and cannot be justified by mere non-consideration of a judicial precedent at the time of original assessment if that amounts only to a change of opinion.
Haryana Acrylic Manufacturing Co. Ltd. v. CIT (308 ITR 38 (Del.))	Reiterated law relating to reopening of assessment under Section 147/148 after the expiry of four years from the end of the relevant assessment year.	The Court referred to this decision as a local precedent reiterating the requirement for tangible material when reopening after the four-year period.
Commissioner of Income Tax II v. Multiplex Trading & Industrial Co. Ltd. (ITA No. 356 of 2013; order dated 22.09.2015)	Held that to reopen an assessment beyond four years from the end of the relevant assessment year, the conclusion that there was failure to disclose material facts must be reached with a certain level of certainty.	The Court relied on this recent decision of the same Court to support the proposition that reopening after four years demands a clear and certain conclusion of non-disclosure, not merely a hindsight reliance on a judicial decision.

Court's Reasoning and Analysis

The Court began by framing the narrow legal question whether the ITAT erred in upholding the Assessing Officer's reopening of the assessment under Section 147. It then examined the statutory framework and relevant precedents relied upon by the parties.

The Court explained the effect of the amendment to Section 147 with effect from 1 April 1989. Prior to the amendment, reopening required the AO to have reason to believe that income escaped assessment because of the assessee's omission or failure to disclose fully and truly all material facts. After the amendment, Section 147(1) broadened the AO's power to reopen where there is a "reason to believe" that income escaped assessment, but the proviso to Section 147 (1) re-introduces a jurisdictional fact when reopening is sought beyond four years from the end of the relevant assessment year: the escapement must be occasioned by failure to make a return in response to section 139/142/148 or failure to disclose fully and truly all material facts.

The Court relied on the Supreme Court's decision in CIT v. Kelvinator of India Ltd. to underscore that, post-amendment, an AO must have "tangible material" to form a reason to believe that income has escaped assessment, and that reopening cannot be used as a device to effect a mere change of opinion.

The Court examined the facts: the assessee had disclosed the royalty payment in its return; earlier years had been allowed as revenue expenditure; the AO had responded to the audit objection and the agreement under which royalty was paid had been provided to the Revenue. The only new basis for reopening in 2009 was that the AO had not noticed the Supreme Court decision in Southern Switchgears (rendered in 1997) at the time of the 2005 assessment.

Applying Kelvinator and subsequent decisions of this Court (including Haryana Acrylic and the recent Multiplex Trading decision), the Court held that the mere fact that a judicial decision existed and had not been noticed by the AO at the time of the original assessment — and relying solely on that decision after four years — amounted to a mere change of opinion. That alone did not constitute the requisite "tangible material" or the jurisdictional fact (failure to disclose fully and truly) necessary to justify reopening after the four-year period. Therefore, the AO did not have the necessary basis to reopen the assessment in 2009.

Holding and Implications

HOLDING: The question was answered in the affirmative in favour of the Assessee and against the Revenue. The impugned order of the ITAT was set aside and the appeal was allowed. The Court ordered no costs.

Implications: The direct effect is that the reopening of the assessment for AY 2002-03 by the Assessing Officer (and the consequent addition of Rs. 19,73,337) is held unjustified and the ITAT's decision upholding reopening is set aside. The opinion applies established principles that reopening after the four-year period requires tangible material showing failure to disclose fully and truly; it does not purport to lay down a novel or broader precedent beyond applying those principles to the facts of this case.

Judge(s): Dr. Justice S. Muralidhar and Mr. Justice Vibhu Bakhru. Order dated 09 October 2015.

Show all summary ...

ITA No.557 of 2015 Page 1 of 8 $~

* IN THE HIGH COURT OF DELHI AT NEW DELHI

+ ITA 557/2015

COPERION IDEAL PRIVATE LIMITED ..... Appellant Through: Mr. Salil Kapoor and Mr. Sumit Lalchandani, Advocates.

versus

COMMISSIONER OF INCOME TAX-II ..... Respondent Through: Mr. N.P. Sahni, Senior Standing counsel With Mr. Nitin Gulati, Advocate.

CORAM:

DR. JUSTICE S.MURALIDHAR

MR. JUSTICE VIBHU BAKHRU

O R D E R

% 09.10.2015

1. This appeal by the Assessee under Section 260A of the Income Tax Act, 1961 („Act") is directed against an order dated 26^thSeptember 2014 passed by the Income Tax Appellate Tribunal („ITAT") in ITA No. 4375/D/2010 for the Assessment year („AY") 2002-03.

2. Admit.

3. Having heard learned counsel for the parties, the following question of law is framed:

"Whether the ITAT erred in law in upholding the reopening of the assessment by the Assessing Officer under Section 147 of the Income Tax Act, 1961 in the facts of the case?"

4. The Assessee filed its return of income for the Assessment Year („AY") 2002-03 on 31^stOctober 2002 declaring income at Rs.67,91,500. The Assessee"s case was selected for scrutiny under Section 143(1) of the Act on 24^thJune 2003. An order was passed on 31^stJanuary 2005 under Section 143(3), assessing the income at Rs.71,46,170. One of the items of expenditure was a sum of Rs.20,71,489 under the head "Royalty & Cess".

5. On 5^thSeptember 2005, the Assistant Commissioner of Income Tax („ACIT") issued a notice under Section 154 of the Act to the Assessee seeking explanation on the ground that there was mistake apparent from the record since the aforesaid amount should have been treated as capital expenditure as the benefit was of enduring nature. The Assessee replied to this notice on 21^stSeptember 2005 clarifying that (a) it was paying royalty at 5% on its domestic sales to M/s Coperion Waeschle Co. Germany on year to year basis; (b) that the payment did not pertain to acquisition of technical knowhow 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. On 24^thMarch 2009, more than four years after the assessment was completed, the ACIT penned the reasons for reopening of assessment as

under:

"The return of income in this case was filed on 31.10.2002 at an income of Rs. 6791500 and processed u/s 143(1) IT Act, 1961 on 24.06.2003. Subsequently, the case was selected for scrutiny and order u/s 143(3) IT Act, 1961 was passed on 31.01.2005 at assessed income of Rs. 7146170.

Section 37 of the IT Act, 1961, provides that any expenditure not being 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 to be treated as capital expenditure.

The perusal of asstt. records for the AY 02-03 reveals that the assessee has debited an amount of Rs 2071489/- under the head 'royalty and cess' (Royalty Rs 1973337/-) that was of enduring nature and hence was a capital expenditure and not allowable. As per the decision of the Hon'ble Supreme Court in the aforesaid case, the said expenditure is not allowable. In view of above facts of the case, I have reasons to believe that the income to the tune of Rs 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 30^thMarch 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 30^thNovember 2009 by the Assessing Officer

(„AO"). The amount of Rs.19,73,337 was added to the income of the Assessee and initiation of penalty proceedings was directed.

9. The Commissioner of Income Tax (Appeals) [CIT (A)] allowed the appeal of the Assessee by order dated 2^ndJuly 2010. The ITAT, by the impugned order dated 26^thSeptember 2014, allowed the Revenue"s appeal.

10. Reliance has been placed by Mr. N.P. Sahni, learned Senior Standing counsel for the Revenue, on the decision of the Supreme 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 subsequent AY 1962-63 the Assessee filed its return showing nil income, the Income Tax Officer issued notice on 3^rd September 1963 stating that the amount ought to have been brought to tax in AY 1961-62 in view of the decision of the Madras High Court in

Ramachari & Co. v. CIT (1961) 41 ITR 142. Following the reply given by the Assessee, the ITO issued a notice under Section 148 read with Section 147(b). The Assessee objected to reopening of the assessment. It was in the above facts and circumstances, 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 context of reopening of assessment sought to be made four years after the expiry of the relevant assessment year of the original assessment. The reopening was done not very long after the initial assessment. Secondly, the decision was rendered in respect of Section 147 of the Act as it stood prior to its amendment with effect from 1^stApril 1989.

13. The effect of the change brought about to Section 147 by way of amendment with effect from 1st April 1989 requires to be examined. Prior to 1^stApril 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 proviso to Section 147

(1) as amended kicks in where the reopening is sought to be done after four years after the end of the relevant assessment year for which the original assessment was made. This brings in the requirement of the AO satisfying himself of the existence of either jurisdictional fact. The escapement of income should be occasioned "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 sub-section(1) of section 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 words "reason to believe" needed a schematic interpretation and that the AO ought not be given power to reopen the assessment on the basis of a mere change of opinion. It was emphasised that "re-assessment has to be based on fulfillment of certain pre-condition and if the concept of 'change of opinion' is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer". The Supreme Court held as under:

"Hence, after 1^stApril, 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 years after the assessment year for which the original assessment was made. Recently, in its decision

dated 22nd September 2015 in ITA No. 356 of 2013 (Commissioner of Income Tax II v. Multiplex Trading & Industrial Co. Ltd.) this Court, in a case where reopening of assessment was sought to be made four years after the expiry of the original assessment, held that "in order to reopen an assessment which is beyond the period of four years from the end of the relevant assessment year, the condition 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 copy of the agreement under which royalty was being paid was provided to the Revenue. The only reason for reopening the assessment was that the decision in Southern Switchgears Ltd. v. CIT 232 ITR 359, 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 31^stJanuary 2005 under Section 143(3) of the Act.

17. In light of the legal position after the amendment to Section 147 of the Act, as explained in CIT v. Kelvinator of India Ltd. (supra), 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 the assessment year for which the original assessment is finalised, the AO seeks to reopen the assessment on the basis of a judicial precedent delivered more than eight years earlier, it would be a case of mere 'change of opinion', something clearly held impermissible by CIT v. Kelvinator of India Ltd. (supra), The threshold requirement of that the AO should, on the basis of some tangible material, conclude that there was escapement of income on account of the Assessee failing to disclose material particulars, is not fulfilled in the present case. Consequently, the reopening of the assessment was, in the facts of the present case, not justified.

18. The question is accordingly answered in the affirmative, i.e. in favour of the Assessee and against the Revenue. The impugned order of the ITAT is set aside.

19. The appeal is allowed, but in the circumstances, with no orders as to costs.

S.MURALIDHAR, J

VIBHU BAKHRU, J

OCTOBER 09, 2015/mg