The order of the Bench was delivered by
D. Manmohan, V. P.-These cross appeals are directed against the order dated 12.01.2011 passed by the CIT(A), Visakhapatanam and they pertain to A.Y. 2001-02.
2. In the appeal filed by the assessee a preliminary issue concerning the validity of reopening of assessment under section 148 of the Income Tax, 1961 was raised.
3. Facts necessary for disposal of the appeals are stated in brief. In the year under consideration the assessee company was engaged in the business of development of computer software. The Visakhapatnam Unit is situated in the Special Economic Zone, i.e. Software Technology Park of Visakhapatnam. The company provides consultancy in software development. The assessee company filed its return of income admitting a loss of Rs3,20,10,425/- on 30.10.2001 wherein the net profit from the STPI Unit was shown, on which deduction under section 10A was claimed. It also claimed adjustment of the loss from non-STPI Units situated at Visakhapatnam and Mumbai. According to the assessee the Mumbai Unit is a Research and Development Unit and its services are utilised by the STPI Unit at Visakhapatnam. Since it is a captive R&D Unit, according to the learned counsel for the assessee, it cannot have a separate commencement date. It is not in dispute that the STPI Units commenced its operations on 08.03.2000 and hence the non-STPI Units, which are only part of the main unit, cannot be said to have a separate commencement date. In fact, from A.Y. 2003-04 onwards losses from R&D unit was reduced from STPI Units and claimed as exempt.
4. During the course of assessment proceedings the AO noticed that the assessee claimed set off of losses from non-STPI Units and also issued notice seeking details with regard to the expenditure in excess of Rs1,00,000/-. The learned counsel for the assessee adverted our attention to pages 1- 3, 16, 19, 23, 27, 29 and 34 of the paper book to submit that the assessee furnished complete details with regard to the losses incurred from non-STPI Units and the AO made a thorough investigation in that regard before making assessment under section 143(3) of the Act. Initially the assessee made a claim under section 10A of the Act but in the alternative claimed deduction under section 10B which was denied by the AO but the fact remains that the AO made a thorough enquiry before completing the regular assessment on 19.03.2004.
5. On 26.11.2007 the AO issued a notice under section 148 of the Act on the ground that the income chargeable to tax for A.Y. 2001-02 has escaped assessment within the meaning of section 147 of the Act. Since reassessment proceedings were taken up beyond a period of four years, reckoned from the assessment year under consideration, assessee requested the AO to provide the reasons for reopening of the assessment. In response thereto the AO communicated the reasons as under: -
"As per Profit & Loss account enclosed to the Return of Income, the company had STIP unit at Visakhapatnam and two non-STPI units, one at Visakhapatnam and other at Mumbai. The STPI unit at Mumbai was engaged in Research and Development work and loss of Rs. 3,38,49,429/- was declared from the unit.
It is seen from the Profit & Loss account of non-STPI that the company had credited interest income (other income) of Rs. 1,92,328/- and debited expenditure of Rs. 3,40,41,756/- and arrived at loss of Rs. 3,38,49,429/-. No business income was offered from Mumbai non- STPI unit. Further, the unit being R&D unit and the expenditure claimed had no connection with STPI, Visakhapatnam, the same was to be capitalized in the absence of commencement of business by the unit and income from the business thereof was to be disallowed."
6. Thereupon the assessee contended that the reassessment proceedings are bad in law. In this regard it was stated that in the notice issued under section 148 of the Act no reasons were recorded for reopening and even in the reasons subsequently communicated it is not the case of the Revenue that there was failure to disclose true facts at the time of making original assessment. It was contended that the assessee company disclosed fully and truly all material facts relating to the income for the assessment year under consideration. Audit Report, Balance Sheet and Schedule to Accounts disclose the income and expenditure as well as fixed assets of R&D Unit at Mumbai separately. Elaborate submissions were made to the AO on all the issues raised during the course of assessment proceedings. The AO took into consideration all the facts and details and passed a detailed order under section 143(3) of the Act. Further, despite having sufficient information with regard to the R&D Unit, at no point of time the AO objected to assessee's claim of carry forward of the losses of the said Unit. It was therefore contended that the present notice, issued under section 148, is only on account of change of opinion on the part of the AO and hence notice issued is not valid in law. It was also contended that no action can be taken for reopening of the assessment after four years unless the AO has reasons to believe that income has escaped assessment by reasons of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. In other words, if the assessee disclosed fully and truly all material facts necessary for assessment, notice under section 148 of the Act is liable to be quashed. Reliance was placed upon several case laws in this regard. It was also contended that reopening is done on the basis of audit objections and hence the reassessment proceedings are invalid. Without prejudice to the above it was contended that the unit setup at Mumbai was to facilitate use of latest and specific technological skills and innovative projects, the need for which was strongly felt by the business. Mumbai is one of the main hubs for innovative I.T. technology and in Mumbai the business had an opportunity to have a tie-up with Mumbai Educational Trust (MET), a Deemed University, for accessing and sharing technology and resources and MET offered facilities and infrastructure which supported wider operations to explore new technology. It was also contended that business had already commenced in the year 1999. Since the unit was exclusively formed to support business requirements, with no outsider as it's customer, the R&D Unit cannot have a separate date of commencement of business and hence the assessee rightly claimed the expenditure incurred on R&D Unit as revenue in nature. The main focus of the assessee was that all the evidences were produced before the AO at the time of making regular assessment and the then AO has noted the non-STPI losses claimed by the assessee in the first paragraph of the order passed under section 143(3) of the Act and the AO having also admitted that the books of account, bills and vouchers, information and documents were produced before him for verification, it cannot now be stated that the AO had no knowledge of the expenditure claimed by the assessee, so as to reopen the assessment by holding that income has escaped assessment.
7. The AO as well as the CIT(A) rejected the contention. The AO observed that the then AO had not called for specific details of expenditure incurred in the non-STPI unit located at Mumbai - the assessment order under section 143(3) discussed about the allowability of exemption under section 10A/10B and nowhere a mention was made about the non-STPI unit. With regard to the claim of the assessee that the AO in the first paragraph of his original assessment proceedings noted about the losses incurred by the non- STPI unit, in the reassessment proceedings the AO observed that a mere mention would not amount to giving a specific finding. In fact there is neither any evidence gathered by the earlier AO nor the assessee produced any evidence with regard to commencement of business and the expenses incurred in R&D unit and non-STPI units and even with regard to the date of commencement of business of the STPI Unit at Visakhapatnam. In short, there is no evidence to prove that the expenditure booked against the R&D Unit is related to business of STPI unit at Visakhapatnam. The AO therefore capitalized the expenditure incurred by the R&D unit of Mumbai by holding that it cannot be treated as revenue expenditure.
8. The learned CIT(A) observed that w.e.f. 01.04.1989 the scope of section 147 has been enlarged so as to empower the AO to initiate reassessment proceedings in cases where it is apparent from record that income chargeable to tax has been underassessed. In his opinion the concept of change of opinion at a subsequent stage becomes irrelevant after the amendment brought into section 147 w.e.f. 01.04.1989. He also observed that there was a bonafide belief on the part of the AO who initiated the reassessment proceedings in as much as there is nothing on record to indicate that the Unit at Mumbai was an R&D unit of the STPI unit at Visakhapatnam for the purpose of supporting the latter. Merely because the AO examined the books of account, bills and vouchers, etc. during the stage of original assessment proceedings it cannot be assumed that the AO properly examined the claim of loss from Mumbai unit and the nexus, whatsoever, with the STPI unit at Visakhapatnam. In addition thereto the assessee company did not make full and true disclosure of all material facts necessary for completion of assessment. In this regard the learned CIT(A) observed that during the original assessment proceedings, though the assessee claimed that Mumbai unit had incurred a loss of Rs3.22 crores, it did not reveal the nature of the activities of Mumbai unit and the year of commencement of business relating to such unit so as to enable the erstwhile AO to examine the correctness and legitimacy of such loss from Mumbai unit. Consequently, the then AO had tamely accepted such claim without bringing on record the necessary information and material about the correctness and legitimacy of such claim. He then concluded that the reassessment proceedings are valid since it was only during such proceedings it has come to light that though the assessee treated the project expenditure in respect of Mumbai operations as a net loss from an independent unit but from subsequent years it sought to set off similar expenditure in respect of Mumbai operations against the profits of its Visakhapatnam unit. In the opinion of the learned CIT(A) the assessee has thus been blowing hot and cold on different times contradicting its own stand taken earlier which in turn highlights that the assessee failed to make full and true disclosure of all material facts relating to its Mumbai operations for A.Y. 2001-02 and 2002-03.
9. Further aggrieved, assessee company is in appeal before us. The learned counsel appearing on behalf of the assessee adverted our attention to Pages 1-4, 16, 19, 27, 29, 34, 36, 37 and 56 to 74 of the paper book in support of his contention that the assessee furnished sufficient material before the AO with regard to the STPI Unit as well as the non-STPI units at Visakhapatnam and Mumbai and whatever details were called for were produced before the AO. The AO verified the claim of the assessee with regard to the loss from non-STPI unit. He has also noticed that the profit from STPI unit was adjusted against non-STPI loss. Since all the details were furnished by the assessee, what inference has to be drawn from the details available from record is the judicial prerogative of the AO and, merely because the latter incumbent AO holds a different view on the matter, assessment cannot be reopened after a period of four years without pointing out that there was failure on the part of the assessee to furnish full and true particulars for completion of assessment. Since the assessee furnished material facts at the time of making regular assessment, reassessment proceedings based upon same set of facts is not permissible in the light of the following decisions: -
i. Hindustan Lever Ltd. vs,. R.B. Wadlar 268 ITR 332 (Bom)
ii. Bhavesh Developers vs. AO 329 ITR 249 (Bom)
iii. Kimplas Trenton Fittings Ltd. vs. ACIT 340 ITR 299 (Bom)
iv. ICICI Bank Ltd. vs. K.J. Rao and Another 268 ITR 203 (Bom)
v. CIT vs. Kelvinator of India Ltd. 320 ITR 561 (SC)
vi. ACIT vs. ICICI Securities Primary Dealership Ltd. 348 ITR 299 (SC)
vii. CIT VS. Viniyas Finance & Investment P. Ltd. 2013-TIOL-135-Del-IT
10. In the case of ICICI Securities Primary Dealership Ltd. (supra) the Apex Court observed that upon completion of assessment under section 143(3) after taking into consideration the details furnished by the assessee, on a mere relook of the accounts, which were earlier furnished by the assessee, the AO cannot reopen the assessment after lapse of four years from the relevant assessment year since it amounts to change of opinion. In the case of ICICI Bank Ltd. (supra) the Hon'ble Bombay High Court observed that if the legal inference drawn from the material facts is erroneous it cannot be said that there is failure on the part of the assessee to disclose true and correct particulars and on the relook of the same material reassessment proceedings cannot be initiated. In the case of Viniays Finance & Investment P. Ltd. (supra) the Hon'ble Delhi High Court observed that if the reasons recorded do not contain any allegations that escapement of income had been occurred on account of failure of the assessee to disclose fully and truly all material facts necessary for his assessment, the AO would be barred from reopening the assessment. In fact the Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. (supra) observed that once the reasons were recorded by the AO they cannot be supplemented by filing an affidavit or making an oral submission. In other words, reassessment proceedings should be directly based upon reasons recorded. Adverting out attention to page 54 of the paper book the learned counsel for the assessee submitted that the notice was issued under section 148 only on the ground that income chargeable to tax escaped assessment but there is no whisper with regard to the issue as to whether there is failure on the part of the assessee to disclose fully and truly all material facts relevant for making assessment and hence at a later stage the AO is not entitled to substitute the reason. It was thus strongly contended that the reassessment proceedings are invalid in law.
11. Without prejudice to ground No. 1 urged before us, the assessee company raised two grounds, i.e. allowability of deduction under section 10B of the Act and correctness of the interest charged under section 234B and 234C of the Act. At the time of hearing the learned counsel submitted that in the event of deciding the first issue in favour of the assessee company there is no need to go into the other two grounds but at the same time he submitted that the assessee is not interested in prosecuting ground No. 2 and ground No. 3 is consequential in nature. With regard to the appeal filed by the Revenue the learned counsel submitted that the issues require to be gone into only in the event of holding that the reassessment proceedings are valid in law.
12. The learned D.R., on the other hand, strongly relied upon the orders passed by the AO as well as the CIT(A). It was contended that the records furnished by the assessee do not clearly indicate that the non-STPI Unit at Mumbai is a capitve unit of STPI Unit at Visakhapatnam. Only during the reassessment proceedings the assessee, for the first time, explained that the Mumbai unit commenced its operations from 1999 onwards and it is a captive R&D unit but these facts were not explained and there was no occasion, at the time of making regular assessment, to go into these details since the AO mainly focussed his attention on eligibility to claim deduction under section10A and 10B of the Act; though he mentioned about the losses from non-STPI unit no detailed enquiry was made in that regard and hence the reassessment proceedings are valid in law.
13. We have carefully considered the rival submissions and perused the record. It is not in dispute that the reassessment proceedings were initiated after expiry of four years from the end of the relevant assessment year and in a case where the original assessment was completed under section 143(3) of the Act two conditions have to be satisfied to issue a notice under section 148 of the Act, i.e., (a) failure on the part of the assessee to make a return under section 143 or to a notice issued under sub-section (1) to section 147 or section 148 or disclose fully and truly all material facts necessary for assessment, and (b) income chargeable to tax has escaped assessment. As can be noticed from the decisions cited above by the learned counsel for the assessee, both the conditions have to be fulfilled in order to initiate proceedings under section 148 of the Act and the AO cannot supplement reasons during the course of assessment proceedings. In the instant case the notice issued under section 148 of the Act merely suggests that the income chargeable to tax has escaped assessment within the meaning of section 147 of the Act and thereafter the assessee was communicated the reasons recorded by the AO wherein the AO has not specified that the reassessment proceedings were initiated because of failure on the part of the assessee to furnish fully and truly all material facts necessary for making assessment. In the instant case computation of total income alongwith annexures as well as the details furnished during the course of regular assessment proceedings clearly indicate that the assessee furnished all the details necessary for the purpose of making an assessment and in the absence of recording a reason that reassessment proceedings were on account of failure on the part of the assessee to furnish true and correct particulars of income, reopening of assessment cannot be said to be valid in law. Under these circumstances we quash the reassessment proceedings. Since the notice issued under section 148 of the Act is held to be bad in law, other issues urged by the assessee in its appeal as well as the grounds urged by the Revenue in the cross appeal do not survive for consideration.In the result, the appeal filed the assessee is treated as allowed whereas the appeal filed by the Revenue is dismissed
The order pronounced in the open court on 17th May, 2013.