IN HIGH COURT OF DELHI AT NEW DELHI 18. W.P.(C) 519/2016 AVTEC LIMITED ..... Petitioner Through: Mr. Salil Kapoor, Mr. Sanat Kapoor, Ms. Ananya Kapoor, Mr. Sumit Lal Chandani and Ms. Soumya Singh, Advocates. versus DY. COMMISSIONER OF INCOME TAX ..... Respondent Through: Mr. Ashok K. Manchanda, Senior Standing Counsel. WITH 19. + W.P.(C) 522/2016 AVTEC LIMITED ..... Petitioner Through: Mr. Salil Kapoor, Mr. Sanat Kapoor, Ms. Ananya Kapoor, Mr. Sumit Lal Chandani and Ms. Soumya Singh, Advocates. versus DY. COMMISSIONER OF INCOME TAX ..... Respondent Through: Mr. Ashok K. Manchanda, Senior Standing Counsel. AND 20. + W.P.(C) 761/2016 AVTEC LIMITED ..... Petitioner Through: Mr. Salil Kapoor, Mr. Sanat Kapoor, Ms. W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 1 of 12 Ananya Kapoor, Mr. Sumit Lal Chandani and Ms. Soumya Singh, Advocates. versus DY. COMMISSIONER OF INCOME TAX ..... Respondent Through: Mr. Ashok K. Manchanda, Senior Standing Counsel. CORAM: JUSTICE S. MURALIDHAR JUSTICE CHANDER SHEKHAR ORDER % 30.05.2017 Dr. S. Muralidhar, J: 1. These are three writ petitions by Avtec Limited which challenge notices dated 31st March, 2015 issued to it by Respondent Deputy Commissioner of Income Tax, Circle-1 [hereinafter referred to as Assessing Officer ( AO )] under Section 148 of Income Tax Act, 1961 and order dated 11th January, 2016 passed by AO disposing of Petitioner s objections thereto. 2. aforementioned notices were issued seeking to reopen assessments of Petitioner for Assessment Years ( AYs ) 2008-09, 2009- 10 and 2010-11. 3. background facts are that Petitioner is engaged in business of manufacturing and selling of automobiles, power trains and power shift transmissions along with their components. W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 2 of 12 4. Petitioner entered into Business Transfer Agreement ( BTA ) with Hindustan Motors Ltd. ( HML ) on 19th February, 2005. In terms thereof Petitioner took over business from HML. Expenses in sum of Rs. 84,38,357 pertaining to professional and legal charges were paid in relation to taking over of business from HML including drafting and due diligence and other contracts reimbursed to HML and ACTIS India and South Asia Fund by separate agreement dated 9th February, 2005. These expenses were considered as capital expenses and allocated to block of assets. Depreciation was accordingly claimed for AY 2006-07. 5. During course of assessment for AY 2006-07 specific query was raised in respect of above claim for depreciation and reply dated 5th December, 2008 was furnished in that regard. While completing assessment for AY 2006-07, claim for above depreciation on professional charges paid was disallowed by assessment order dated 24 th December, 2008. 6. Assessee then took said assessment order for AY 2006-07 in appeal to Commissioner of Income Tax (Appeal) [ CIT (A) ]. After CIT (A) dismissed appeal, Petitioner went before Income Tax Appellate Tribunal ( ITAT ) which restored matter to file of AO for fresh examination. 7. Although Mr. Ashok Manchanda, learned Senior Standing Counsel for Revenue contends that he has no instructions on what transpired before AO thereafter as regards AY 2006-07, Mr. Salil Kapoor, learned counsel for Petitioner states that said disallowance was deleted by AO in W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 3 of 12 view of what transpired in later AYs. 8. As far as AY 2007-08 was concerned, AO again disallowed depreciation following his earlier order for AY 2006-07. However when matter went in appeal at instance of Assessee, CIT (A) by order dated 6th September, 2013 (for AYs 2007-08) deleted disallowance by holding as under: " It is seen from assessment order that assessing officer has disallowed capitalization of legal and professional charges by placing reliance on Article 13.4 of Business Transfer Agreement according to which seller (HML) shall bear all cost and expenses (including professional fees and cost of advisors and counsel) in relation to this agreement. Assessing officer there after refers to Section 43(1) wherein 'actual cost' is defined and Section 43(2) where in word 'paid' is defined. Assessing Officer held that since liability to pay professional and legal charges as per agreement was that of Hindustan Motors Limited therefore in view of provision of section 43 these charges of Rs.84,38,357/- cannot be claimed by appellant as liability of appellant. It is observed that fact of incurring of legal and professional charges of Rs. 84,38,357/- by appellant are not in dispute. These charges are essentially for effecting takeover of business units of Hindustan Motors. Since payment is for perfecting profit earning apparatus of appellant therefore it is logical corollary that same has to form part of actual cost of acquisition of assesse. Accordingly, capitalization of such expenses is allowed on which claim of depreciation is also directed to be allowed. 9. order of CIT (A) for 2007-08 was taken up in appeal by Revenue to ITAT. After that appeal was dismissed, Revenue W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 4 of 12 approached this Court. However, since monetary effect was below permissible limit in terms of extant circular, Revenue's appeal was not entertained. In other words, order of CIT (A) for AY 2007-08 allowing claim for depreciation became final. 10. Petitioner filed its return of income for 2008-09 on 29th September, 2008. said return was picked up for scrutiny and assessment was completed by AO passing assessment order under Section 143(3) of Act on 28th December, 2010 assessing income at Rs. 23,76,81,420 against returned income at Rs. 18,17,45,456 after making various additions. 11. impugned notices dated 31st March, 2015 were issued by AO under Section 148 of Act seeking to reopen proceedings for AY 2008-09, 2009-10 and 2010-11. By order dated 18th December, 2015, copy of reasons was furnished to Petitioner. These reasons were communicated in prescribed proforma. In Column No. 11 under caption reasons for belief that income has escaped assessment , it was stated as under: brief facts of case are as follows: M/s Avtec Ltd has claimed depreciation of Rs.7,16,299/- on professional charges capitalized amounting to Rs.46,68,571/-allocated to various block of assets which is not allowed as per provision of section 43(1) of IT Act, 1961 as not included in actual cost as per provision of section 43(1) and 43(2) since article 13.4 of Business Agreement dated 19.02.2005 between Hindustan Motor ltd. (Seller) and Avtec Ltd. (Purchaser) which read thus: "13.4 Expenses seller shall bear all costs and expenses (including W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 5 of 12 professional fees and costs of advisors and counsel) in relation to this Agreement and transactions contemplated herein, including in relation to all documents which are to be executed in accordance with terms hereof". Since seller i.e. Hindustan Motor Ltd. bore all cost and expenses including professional fees therefore depreciation on professional charges capitalized to various blocks amounting to Rs.7,16,299/- is not allowed as per provision of section 43(1) of IT Act, 1961. In view of above, I have reason to believe that due to failure on part of assessee to disclose all material facts truly or fully, income of Rs.7,16,299/- have escaped assessment. In view of above proceedings u/s 147 is to be initiated to assessed income chargeable to tax which has escaped assessment (total amount of Rs.7,16,299/- as discussed above on account of assessee s failure to disclose fully or truly all material facts necessary for its assessments for AY 2008-09. Necessary sanction of issue of notice u/s148 may kindly be granted. 12. Identical reasons were furnished for AYs 2009-10 and 2010-11. As already noted Petitioner s objection to reopening was disposed of by AO by impugned orders dated 11th January, 2016 which has also been challenged. notice under Section 142(1) of Act was issued on same date. 13. Writ Petition (C) Nos. 519, 522 and 761 of 2016 were filed by Petitioner challenging three notices dated 31st March, 2015 and orders dated 11th January 2016 of AO disposing of Petitioner's objections. writ petitions were heard on 1st February, 2016. Court W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 6 of 12 stayed further proceedings pursuant to aforementioned notices dated 31 st March, 2015 and orders dated 11th January, 2016. interim orders have continued since. 14. Mr. Salil Kapoor, learned counsel for Petitioner submitted that reopening of assessment was bad in law as it failed to satisfy jurisdictional requirements under proviso to Section 147 of Act for two of AYs i.e., AY 2008-09 and 2009-10. As far as reopening of assessments for said two AYs, it was incumbent on Revenue to demonstrate that there was failure on part of Petitioner in making full and true disclosure of all material facts. He submitted that in fact there was no failure at all on part of Assesse to disclose fully and truly all material facts. From AY 2006-07 onwards, Revenue was aware of claim for depreciation made by allocating aforementioned expenses to block of assets and treating them as capital expenses and claiming depreciation thereon. 15. Mr Kapoor further pointed out that in subsequent years i.e., AYs 2011-12 and 2012-13 same claim for depreciation has already been allowed. He submitted that there had to be fresh material to justify reopening of assessment. In present case, he submitted that reopening was based on mere change of opinion on same material that was already available with Revenue. Even for AY 2010-11, there was no basis for forming reasons to believe that income had escaped assessment. Inter alia he placed reliance on decision of Full Bench of this Court in Commissioner of Income tax v. Kelvinator of India Ltd. [2002] 123 W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 7 of 12 taxman 433 (Del) (FB) and consequential judgment of Supreme Court in Commissioner of Income tax, Delhi v. Kelvinator of India Ltd. [2010] 187 taxman 312 (SC). Reliance was also placed on decisions of this Court in Mohan Gupta (HUF) v. Commissioner of Income Tax [2014] 366 ITR 115 (Del) and Commissioner of Income tax v. Orient Craft Ltd. [2013] 354 ITR 536 (Del) which was affirmed by Supreme Court by dismissal of Special Leave Petition filed by Revenue on 20 th January, 2014. 16. In reply, Mr. Ashok Manchanda, learned counsel for Revenue, submitted that although Petitioner may have disclosed BTA and fact of claiming depreciation by allocating professional legal charges etc. as capital expenses to block of assets for claiming depreciation thereon for AY 2006-07 and 2007-08, no such disclosure was made at time of assessment for AYs 2008-09, 2009-10 and 2010-11. According to him, in none of three AYs did Petitioner mention in its return filed or during assessment that this was disputed claim and was disallowed by AO for AYs 2006-07 and 2007-08. In assessment orders for these three AYs, therefore, there is no discussion in relation to this issue. It inadvertently escaped attention of AO. Having already made similar additions for earlier two AYs 2006-07 and 2007-08 there was no reason for AO to not disallow depreciation on above basis in AYs in question. 17. Mr. Manchanda submitted that it was Assessee's mentioning before ITAT during hearing of appeal for AY 2007-08 that there were W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 8 of 12 no additions made on this issue that became fresh source of information for Department. He submitted that Petitioner had failed to mention in Schedule of Depreciation that costs/written down value of certain assets included such amounts which were not of capital nature or their admissibility was otherwise disputed. Had there been such mention by Petitioner, it would not have escaped notice of AO. 18. Mr. Manchanda stated that he was not aware whether in AYs 2011-12 and 2012-13 claim for depreciation had been allowed. In any event according to him rule of consistency required AO to follow what was done for AYs 2006-07 and 2007-08. On merits he submitted that there was no question of allowing such claim for depreciation in terms of Section 35D of Act which placed restrictions. Expenses like professional legal charges and contract drafting charges etc. could not be capitalised with capital assets like plant and machinery and this was not eligible for depreciation. 19. In present case, Court finds that reasons for reopening assessment for AYs 2008-09 and 2009-10 proceeded on basis that Assesse had failed to make full and true disclosure of material facts concerning claim for depreciation. This cannot be accepted for simple reason that there was history of litigation around such claim beginning in AY 2006-07. mere fact that incumbent AO dealing with returns of Assesse was different from AO who dealt with there for AYs 2006-07 and 2007-08 will not excuse AO from examining history of case. W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 9 of 12 20. On its part, it was not necessary for Assessee to enclose copy of BTA every year and explain basis for claim of depreciation. In any event, assessments for AYs 2008-09 and 2009-10 were completed under Section 143 (3). There was no fresh material to disclose. On this aspect, there was no change in circumstances. Therefore, there was no failure by Assessee to make full and true disclosure of all material facts relevant to assessment. 21. Mr. Manchanda sought to emphasize that each AY was different and, therefore, AO was not obliged to look into previous records. Court is unable to agree with this approach of AO. If AO was seeking to invoke Section 148 of Act for AYs 2008-09 to 2010-11 it was incumbent on him to ascertain status of identical claim in earlier AYs. After all he was seeking to reopen assessment only on aspect of claim of depreciation. On this very aspect Revenue had for AY 2006- 07 taken matter up to ITAT and matter had been remanded to AO. For AY 2007-08, CIT (A)'s order allowing claim had attained finality. These facts could not have escaped attention of AO. In any event, there was no fresh material that AO came across to warrant reopening of assessments for AYs 2008-09 and 2009-10. plea that AO inadvertently allowed claim for depreciation for AYs 2008-09, 2009-10 and 2010-11 cannot in circumstances be accepted. 22. Supreme Court in Commissioner of Income tax v. Kelvinator of India Ltd. (supra) while affirming decision of full Bench of this Court on interpretation of Section 147 of Act observed thus: W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 10 of 12 ...However, one needs to give schematic interpretation to words reason to believe failing which, we are afraid, Section 147 would give arbitrary powers to Assessing Officer to re- open assessments on basis of mere change of opinion , which cannot be per se reason to re-open. We must also keep in mind conceptual difference between power to review and power to re-assess. Assessing Officer has no power to review he has power to re-assess. Bur re-assessment has to be based on fulfilment of certain pre-condition and if concept of change of opinion is re-opening assessment, review would take place. One must treat concept of change of opinion as in built test to check abuse of power by Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is tangible material to come to conclusion that there is escapement of income from assessment. Reasons must have live link with formation of belief... 23. In present case, tangible material that AO came across for AYs in question that warranted reopening of assessments is not clear from 'reasons to believe' recorded by AO. reasons merely record fact that HML had borne costs and expenses including professional fee and, therefore, capitalisation of those expenses to various block of assets was not allowable under Section 43(1) of Act. After recording above statement, AO adds: I have reason to believe that due to failure on part of assesse to disclose all material facts truly or fully, income of Rs.7,16,299 have escaped assessment. This does not satisfy requirement of law that reasons to believe should, where reopening is after expiry of four years from end of FY, specifically state in what manner there was failure by Assessee to make full and true disclosure of material facts. That, again, will have to be preceded by spelling out tangible fresh material that led AO to come W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 11 of 12 to that conclusion. None of this is found in reasons to believe recorded by AO in case on hand. necessity for tangible material to be present to trigger reopening was emphasised in Commissioner of Income tax v. Orient Craft Ltd. (supra). 24. repeated assertion by Mr. Manchanda that claim for depreciation for AYs 2006-07 and 2007-08 was disallowed by AO is not entirely correct. It overlooks history of litigation around claims for those AYs with both ending in Assessee ultimately succeeding on point after remand to AO by ITAT for AY 2006-07 and level of CIT (A) for AY 2007-08 . Mr. Manchanda has also not been able to counter submission that for AYs 2011-12 and 2012-13 same claim for depreciation has been allowed. 25. For all of aforementioned reasons, writ petitions are allowed and notices dated 31st March, 2015 and consequential orders dated 11th January, 2016 passed by AO disposing of Petitioner s objections are hereby set aside. No order as to costs. S. MURALIDHAR, J CHANDER SHEKHAR, J MAY 30, 2017 dn W.P. (C) Nos. 519/2016, 522/2016 & 761/2016 Page 12 of 12 Avtec Limited v. Dy. Commissioner of Income-tax