IN HIGH COURT OF DELHI AT NEW DELHI 33 W.P. (C) 7828/2010 Reserved on: 6th July 2017 Decision on: 26th July, 2017 ORACLE INDIA PRIVATE LIMITED ..... Petitioner Through: Mr. M.S. Syali, Senior Advocate with Mr. Mayank Nagi, Mr. Tarun Singh, Advocates. Versus ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 13(1), NEW DELHI ....Respondent Through: Mrs. Prem Lata Bansal, Senior Advocate with Mr. Rahul Chaudhary, Senior Standing Counsel with Mr. R.A. Bansal, Advocates. CORAM: JUSTICE S.MURALIDHAR JUSTICE PRATHIBA M. SINGH JUDGMENT 26.07.2017 Dr. S. Muralidhar,J.: 1. This writ petition by Oracle India Private Limited ( OIPL ) (hereafter 'Assessee') challenges notice dated 31st March, 2010 issued by Deputy Commissioner of Income Tax, Circle 13(1) [hereafter Assessing Officer ( AO )] under Section 147/148 of Income Tax Act, 1961 ( Act ) seeking to re-open assessment for Assessment Year ( AY ) 2003-2004. W.P.(C) 7828/2010 Page 1 of 29 Background facts 2. Assessee is wholly-owned subsidiary of Oracle Systems Corporation, USA ( OSC ), formerly known as Oracle Corporation. Assessee entered into Agreement dated 28 th May, 1993 known as Software Duplication and Distribution License Agreement ( SDDLA ) for duplication and distribution of software. SDDLA was valid for five years, which was renewable on year-to-year basis. last renewal relevant to AY in question was on 1st June, 2002. Assessee is also stated to be engaged in activity of software development. 3. On 31st January, 2005, Assessee filed its return declaring income of Rs. 81,26,08,093. Assessee inter alia claimed deduction under Section 80-IB and Section 10A of Act. 4. return was picked up for scrutiny and notice under Section 143(2) of Act was served upon Assessee. Pursuant thereto, Assessee revised its return on 31st March, 2005 declaring income of Rs. 1,05,02,40,927. assessment was completed under Section 143(3) of Act by AO by order dated 17th February, 2006 making following disallowances and enhancing total taxable income to Rs. 1,62,64,66,350: (i) Disallowance of part of royalty expense claimed of Rs. 18,12,77,408. Reliance was placed on earlier years i.e., AY 2000-01, 2001-02 and 2002-03 wherein basis of disallowance was application of Section 92 (old section) to facts of case. W.P.(C) 7828/2010 Page 2 of 29 (ii) Deduction under section 80-IB of Act of Rs. 30,88,81,184. basis of disallowance was that Petitioner was not carrying on any manufacturing/production activity and was merely duplicating products manufactured and procured by OSC, which did not amount to manufacturing/production of articles or things as per provisions of Section 80-IB of Act. (iii) Expenditure on import of software master copy (Rs. 9,95,460 net of depreciation @ 75% under Section 32 of Act) of Rs. 7,46,595. cost of import of master copy used for duplication of software from master copy being in nature of capital expenditure and not revenue expenditure. (iv) Income from software development centre (deduction under section 10A) of Rs. 8,53,20,234. 5. Assessee then went in appeal before Commissioner of Income Tax (Appeals) [ CIT(A) ]. By order dated 26th October, 2006, CIT(A) deleted disallowance on (ii), (iii) and (iv) above. However, CIT(A) upheld disallowance on (i) above. 6. Both, Assessee as well as Revenue went in appeal before Income Tax Appellate Tribunal ( ITAT ). By orders dated 16th December, 2008 and 5th August, 2009, ITAT disposed of Department s appeal and Assessee s appeal, respectively. Except on issue of allowability of cost of software master copy as revenue expense, all other issues were decided in favour of W.P.(C) 7828/2010 Page 3 of 29 Assessee. 7. Assessee then preferred appeal before this Court on issue of allowability of expenditure on software master copy as revenue expenditure. This Court by order dated 29th May, 2009 passed in ITA No. 684/2009 admitted appeal and framed substantial question of law. said appeal was subsequently allowed on 31st August, 2015. 8. Revenue s appeal on issue of eligibility of claim of tax holiday under Section 80-IA of Act and other issues was dismissed by this Court by order dated 1st September, 2009, which has been affirmed by Supreme Court by dismissing Revenue s SLP by order dated 22nd October, 2010 in SLP(C) CC No. 15810/2010. appeal of Revenue on issue of disallowance of part claim of royalty expenditure being ITA No. 987/2010 was dismissed by this Court on 30th March, 2011. Notice under Section 148 9. After more than four years from end of relevant AY i.e., 2003-04, which period ended on 31st March, 2008, AO issued impugned notice under Section 148 of Act to Assessee on 31 st March, 2010 stating that he had reasons to believe that income had escaped assessment. summary of reasons for re-opening assessment, as communicated to Assessee by AO were as under: i. Failure of Assessee to add back cost of acquisition of software by W.P.(C) 7828/2010 Page 4 of 29 development division (as reported in para 17 (1) of Tax Audit Report for year ended 31st March, 2003) for computation of total income for AY in question. proposed addition on this score was Rs. 55,38,275. ii. wrong claim made by Assessee of principal amount of Rs. 1,54,19,985 included in finance lease rentals paid during AY 2003-04. iii. Failure of Assessee to add back capital expenditure in nature of Fixed Assets Written Off debited to profit and loss account (as mentioned in Note 13 of Notes to Revised Computation of Taxable Income for year ended 31st March, 2003) in sum of Rs. 4,85,74,591. iv. Incorrect and excess claim by Assessee of deduction under Section 80-IB of Act for profits of its Delhi Division. v. Failure to deduct and deposit withholding taxes in sum of Rs. 2,26,22,320 under Section 40(a)(i) of Act in computation of taxable income. 10. By letter dated 25th October, 2010 Assessee filed its objections to assumption of jurisdiction under Sections 147/148 of Act. Assessee furnished detailed reasons why none of reasons mentioned were tenable in law and in fact. objections were disposed of by AO by order dated 4th November, 2010 relying on decision of Supreme Court in Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191 and of this Court in Consolidated Photo and W.P.(C) 7828/2010 Page 5 of 29 Finvest Ltd. v. ACIT (2006) 151 Taxman 141 (Del). It was observed that re-assessment proceedings were valid since Assessee did not fully and truly disclose all material during original assessment proceedings. Thereafter, present petition was filed. By order dated 23rd November, 2010 while directing notice to issue in petition, this Court directed that assessment proceedings could go on but no final order would be passed. That interim order has continued since. Submissions of Senior counsel for Assessee 11. Mr. M.S. Syali, learned Senior Counsel appearing for Assessee, submitted as under: (i) As regards addition of capital expenditure in sum of Rs. 55,38,275 on acquisition of software and of Rs. 48,85,74,591 on account of fixed assets written off on ground that these amounts had not been added back to computation of income, said assumption was factually wrong. Both amounts had in fact been added back to computation of taxable income under capital expenditure debited to Profit and Loss Account in revised return. (ii) In counter-affidavit filed by Revenue in present case, this fact had been admitted and yet Revenue wanted to verify these facts. There could not be re-opening of assessment merely because certain facts had to be verified. It was plain that there was no failure by Assessee to disclose material facts relating to above items. W.P.(C) 7828/2010 Page 6 of 29 (iii) As regards second reason that presumption should be drawn that disallowable item has been claimed as deduction since notes to computation of total income in audit of accounts stated that tax and accounting treatment differ, accounting treatment was in fact explained in detail by Assessee in accounts itself. (iv) issue concerned financial lease in which lessee does not become owner of equipment. For accounting purposes, economic ownership is accepted. In terms of AS-19, which had to be followed, payment made pursuant to financial lease was divided between interest and principal on estimate basis. However, for purposes of income tax, since lessee is not owner, whatever is paid to owner is lease rent only, which is wholly allowable. nomenclature for accounting was not determinative for tax purposes. Sufficient disclosure was made even at time of original assessment proceedings in balance sheet produced before AO. (v) During assessment proceedings for AY 2005-06, questionnaire dated 28th November, 2008 was issued to Assessee by AO. queries were answered and details furnished by Assessee in reply thereto. said reply was accepted by AO in assessment order dated 29th December, 2008 for said AY 2005-06 without drawing any adverse inference. More than year thereafter, re- opening was sought to be done for AY in question i.e., AY 2003-04 on 31st March, 2010. Therefore, there was no failure on part of Assessee to disclose material particulars. W.P.(C) 7828/2010 Page 7 of 29 (vi) fourth reason concerned deduction claimed on account of manufacture of software under Section 80-IB at Rs. 30,88,81,184 which constituted 30% of profit i.e., Rs. 102.96 crores. This issue was discussed at length in original assessment order. specific query was raised in course of original assessment proceedings. (vii) presumption that production started in January, 1993 was incorrect. This was evident from assessment record of first year of claim as well as what was mentioned in Form-10CCB. Commercial operations commenced only after Agreement dated 28th May, 1993 was entered into. year of commencement was, therefore, AY 1994- 95 and not AY 1993-94. From initial year i.e., AY 1994-95, AY in question i.e., AY 2003-04 was 10th year. There was no claim made thereafter under Section 80-IB. re-opening was made on erroneous presumption that year of commencement was AY 1993- 94. Reference was also drawn to assessment order dated 12 th March, 1998 for AY 1995-96 which noted eligibility under Section 80-IA. (viii) As regards reasons contained in paras 4.2 and 4.3 of reasons furnished by AO for re-opening of assessment, viz., that turnover of undertaking was more than amount on which royalty was paid and, therefore, claim under Section 80-IB was inflated, it was explained that there was segmental breakup in record of AO. issue as regards basis on which royalty was payable was examined extensively in assessment proceedings. basis of royalty was 30% of Indian published price, even though sale might have been at different price. W.P.(C) 7828/2010 Page 8 of 29 (ix) This was clear case of change of opinion by AO. Even in remand report dated 1st May, 2002, no adverse comments were made by AO for CIT(A) who by order dated 18 th November, 2002 accepted Assessee s submission and restricted observations on ground that activity of duplication did not amount to manufacture. order of CIT(A) was affirmed by ITAT and by this Court in Oracle India (P.) Ltd. v. Commissioner of Income Tax (2014) 264 CTR 144 (Del). SLP against said order was dismissed by Supreme Court in CIT s. Oracle Software India Ltd. (2010) 320 ITR 546 (SC). (x) Reason No. 5 (i) given by AO was that there was no evidence of Delhi Division of OIPL being registered as industrial undertaking , it was pointed out that there was no such requirement in law. This Court has in Praveen Soni v. CIT (2011) 333 ITR 324 (Del) held that said registration was not essential. In any event, there was no failure by Assessee to furnish all material facts. (xi) Reason No. 5 (ii) was that Assessee had failed to disclose material fact concerning change of its location from Delhi to Gurgaon. It is pointed out that this change was presumption drawn by Revenue and was not fact. Reference is made to report in Form 10-CCB. (xii) Reason No. 5 (iii) was that highly paid executives could not possibly be construed as workers. It was pointed out that there are no W.P.(C) 7828/2010 Page 9 of 29 particulars for arriving at above conclusion which was based entirely on surmises and conjectures. (xiii) Reason No. 6 was that Auditors had stated that deduction under Section 80-IB was only estimate. It was pointed out that Form 10-CCB was signed by another Auditor separately whereas Audit Report itself was signed on 30th March, 2005. In any event, this was hardly justification for re-opening of assessment. (xiv) 7th reason was that cost of master copy being Rs.2,26,22,320 could not be disallowed as deduction since it was not envisaged in royalty agreement. In any event, if it had to be allowed, it had to be treated as royalty. In this regard, it was pointed out that stand taken by Revenue was contradictory. In original assessment order, expenditure of master copy was disallowed as capital expenditure to extent of Rs.9,95,460. This was obviously, therefore, examined in detail during course of assessment proceedings. (xv) 8th reason was that there were comments made by Auditors about proper records not being maintained and non-compliance with provisions of Companies Act. Assessee drew Court s attention to Audit s Report where in para 2 Auditor pointed out its inability to verify items (a) - (h) noting that they were unable to perform alternate audit procedures to satisfy ourselves as to appropriate balances in books of accounts owing to nature of company s records . Consequently, this also was not valid reason for W.P.(C) 7828/2010 Page 10 of 29 disallowing continuance. Submissions of Senior counsel for Revenue 12. Mrs. Prem Lata Bansal, learned Senior Counsel appearing for Revenue, stated that it was apparent from accounts that additions as stated in reasons 1 and 3 had in fact been made. According to her, this required verification and, therefore, AO should be permitted to proceed with assessment proceedings for this purpose. She placed reliance on decisions in CIT v. Usha International Limited (2012) 348 ITR 485 (Del), OPG Metals & Finsec Ltd. v. CIT (2013) 358 ITR 144 (Del) and Indian Hume Pipe Co. Ltd. v. ACIT (2012) 348 ITR 439 (Bom) to urge that mere production of accounts would not relieve Assessee of responsibility of showing that Assessee had made full and true disclosure of all material facts necessary for assessment in first round of assessment proceedings. Ms. Bansal maintained that under Explanation 1 to Section 147, mere production of accounts would not necessarily be deemed to be disclosure. 13. As far as reason No. 2 regarding finance lease and difference in treatment for accounting purposes is concerned, she submitted that there was no occasion for AO in first round to appreciate this distinction. mere filing of revised return would not amount to full and true disclosure. As regards claim for deduction under Section 80-IB of Act was concerned, she pointed out that in original assessment order while disallowing said claim, limited issue considered by AO was that duplication and distribution of W.P.(C) 7828/2010 Page 11 of 29 products was not tantamount to manufacturing of any product. It was during course of assessment proceedings for other AYs that AO referred to assessment record of present AY i.e., AY 2003- 04 and found that Assessee had failed to prepare its accounts properly and to disclose all relevant facts. It was on that basis that he formed reason to believe that income had escaped assessment. 14. Mrs. Bansal submitted that assessment order dated 17th February, 2006 for AY 2003-04 gives working of calculation of royalty and that it had been computed on total turnover of Rs. 124.81 crores. Royalty was to be computed on sub-license, duplication and distribution income which was claimed to be eligible for deduction under Section 80-IB. profit on remaining turnover of Rs. 102.56 crores (Rs. 227.37 crores Rs. 124.81 crores) was not eligible for deduction under Section 80-IB. She maintained that assessment regarding claim of deduction under Section 80-IB in respect of profit earned on turnover of Rs. 102.56 crores was not examined by AO in original assessment order. 15. As regards debiting of expenditure of payment of Rs. 2.26 crores as cost of master copy paid by Assessee to its parent company, Ms. Bansal submitted that this was in nature of royalty as defined under Section 9(1)(vi) of Act and relevant provisions of Double Taxation Avoidance Agreement ( DTAA ) between India and USA. Assessee was, therefore, liable to deduct TDS on said royalty payment. In event of non-deduction of TDS, Assessee was obligated to add back said sum under Section 40(a)(i). W.P.(C) 7828/2010 Page 12 of 29 This was not disclosed by Assessee or considered by AO during original assessment proceedings under Section 143(3) of Act. 16. Ms. Bansal also submitted that even otherwise Assessee failed to fulfil certain statutory conditions for claiming deduction under Section 80-IB of Act. In first place, establishment in Delhi was not industrial undertaking. It was merely office where work of duplication and distribution of software developed by parent company was undertaken. requirement of minimum number of employees was also not fulfilled. It was also not registered as industrial undertaking. These issues were neither raised nor discussed in original assessment proceedings. 17. Further, as per para 10 of 10-CCB Report, address was shown as Gurgaon. This implied that Delhi Division had closed and shifted to Gurgaon, which fact was never disclosed. Ms. Bansal pointed out that statutory Auditor engaged by Assessee had issued qualifying remarks as claim under Section 80-IB of Act as regards maintenance of accounts. Chartered Accountant i.e., S.R. Batliboi & Associates who completed tax audit on 30th March, 2005 declined to certify genuineness and appropriateness of claim under Section 80-IB of Act. Form 10-CCB was certified by another Chartered Accountant firm i.e., Gaurav Gupta & Associates on 31st March, 2005. This required verification and, therefore, re-opening of assessment was justified. 18. Relying on decision in Raymonds Woollen Mills v. ITO (1999) W.P.(C) 7828/2010 Page 13 of 29 236 ITR 34 (SC), Ms. Bansal submitted that at time of initiation of proceedings under Section 147 of Act, AO had to only examine whether there was prima facie some material on basis of which assessment should have been re-opened. It is not open to Court in exercise of its writ jurisdiction to go into sufficiency and/or correctness of material which forms basis of re-opening of assessment. Court was not expected to act as appellate authority. Reliance was placed on decision in Bawa Abhai Singh v. DCIT (2002) 253 (ITR) 83 (Del.). 19. As regards finance lease rentals, Ms. Bansal pointed out that Assessee had actually deducted sum of Rs. 1,54,19,985 from taxable income. In case of financial lease, payment on account of principal was in nature of capital expenditure. Therefore, it could not be deducted from profits. statement of Assessee that it added back depreciation on assets acquired on finance lease was not verifiable from records. AO was, therefore, justified in concluding that Rs. 1,54,19,985 had escaped assessment and constituted wrong claim on part of Assessee. Even deduction under Section 80-IB during AY in question was erroneous. last eligible year for deduction was AY 2002-03 and Auditor had qualified audit report regarding commencement of operation; later claiming it to be typing error was simply afterthought. financial results with return of AY 1994-95 showed that period of operation of financial year was shown as 18th January, 1993 to 31st March 1994. Thus, it is apparent that Assessee had commenced W.P.(C) 7828/2010 Page 14 of 29 its operation in financial year 1993 itself. Even on this ground, re-opening of assessment was fully justified. Analysis and Reasons 20. above submissions have been considered. It requires to be noticed that this is case where original assessment for AY 2003-04 took place under Section 143(3) of Act. very detailed assessment order has been passed in first instance by AO to which reference will be made thereafter. re-opening has been made by notice dated 31st March, 2010 which is after expiry of 4 years from end of relevant assessment order. Therefore, first proviso to Section 147 is attracted. 21. jurisdictional requirement that has to be fulfilled for justifying such re-opening of assessment where assessment originally has been made under Section 143(3) of Act and where re-opening is after expiry of 4 years from end of relevant AY is that Revenue has to show that some income chargeable to tax escaped assessment by reason of failure on part of Assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year . 22. Importantly, Section 147 underwent significant change by Direct Tax Laws (Amendment) Act, 1987 with effect from 1st April, 1989. Supreme Court in CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC) has held that after 1st April, 1989, AO has power to re-open assessment in terms of first proviso to Section 147 W.P.(C) 7828/2010 Page 15 of 29 of Act provided there is tangible material to come to conclusion that there is escapement of income from assessment. Placing reliance on decision of CIT v. Kelvinator of India Ltd. (supra), this Court in Coperion Ideal Private Limited v. Commissioner of Income Tax-II (2015) 378 ITR 525 (Del.) held as under: 14. .... Supreme Court emphasised that although power to reopen is much wider after amendment, words reason to believe needed schematic interpretation and that Assessing Officer ought not to be given power to reopen reassessment has to be based on fulfilment of certain pre-condition and if concept of change of opinion is removed, as contended on behalf of Department, then, in garb of reopening 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 23. It has been repeatedly emphasized in several decisions including aforementioned decision in CIT v. Kelvinator of India Ltd. (supra) that re-opening of assessment on same material that was available with AO during original assessment proceedings would be case of mere change of opinion. 24. What Explanation (1) does is to clarify that mere production of account books or other evidence by Assessee before AO from which AO, with due diligence, could have discovered material evidence would not necessarily amount to disclosure. In other words, fact of production of account books and other evidence should not be presumed to be making of disclosure of all material facts by Assessee. Nevertheless, burden is on AO to show that W.P.(C) 7828/2010 Page 16 of 29 there has been failure by Assessee to disclose fully and truly all material facts necessary for assessment. 25. In situation where Assessee has already produced all account books and other evidence, while Explanation (1) may not lead to automatic presumption of disclosure, unless there is some fresh tangible material available with AO, he will not be able to show that there was failure on part of Assessee to disclose fully and truly all material facts. If material is that which was already available during original assessment proceedings, AO will be unable to show that there has been failure by Assessee to disclose fully and truly all material facts. 26. expression will not necessarily amount to disclosure as used in Explanation 1 to Section 147 of Act brings in element of subjectivity and also requirement of assessing on case-to-case basis where in fact there has been full disclosure by virtue of Assessee producing account books and other evidence in first instance. This explanation, therefore, would not relieve AO of burden of demonstrating Assessee s failure to make full and true disclosure of all material facts necessary for assessment for AY in question. 27. second aspect of matter is that above jurisdictional requirement should be shown to have been fulfilled from reasons for re-opening of assessment. In other words, reasons must speak for themselves. mandatory jurisdictional requirement in W.P.(C) 7828/2010 Page 17 of 29 terms of first proviso to Section 147 of Act will not be fulfilled if reasons do not themselves clearly indicate that there was in fact failure by Assessee to make full and true disclosure of all material facts. reasons have to explain what material was that was not disclosed by Assessee which Assessee ought to have disclosed in first instance. This should be apparent from reading of reasons themselves. reasons have to go beyond merely repeating language of provision regarding failure of Assessee to make full and true disclosure of material facts. They should indicate in what manner was there such failure. 28. In many of cases, where re-opening of assessment is challenged, Revenue tries to make up for obvious defect in reasons themselves which do not spell out reasons by providing justification at stage of disposal of objections or later in counter-affidavit when re-opening is challenged by writ petition. This, again, is impermissible in law. Since reasons must speak for themselves, subsequent attempt to supply omission at stage of order disposing of objections raised by Assessee or providing them in counter-affidavit in reply to writ petition or even worse, making good that defect in course of arguments before Court, will simply not suffice. 29. In present case, what Ms. Bansal attempted to do as regards reasons (1) and (3) falls under last category. Her submission that perusal of accounts did not reveal that Assessee added back capital expenditure on acquisition of software and value of fixed W.P.(C) 7828/2010 Page 18 of 29 assets (Reason Nos. 1 and 3) is not apparent either from reasons themselves. reasons for re-opening of assessment in present case qua reasons (1) and (3) read as under:- 1. From perusal of assessment record of M/s Oracle India Private Limited for AY 2003-04, it has been observed that in para 17(1) of Tax Audit Report in Form No. 3 CD, it has been specifically mentioned that amount of Rs. 55,38,275 representing cost of acquisition by software division was of capital nature and thus was liable to be added back to computation of total income. No such amount has been added back which has resulted in understatement of taxable income by Rs. 55,38,275 because of failure on part of assessee to compute and declare true taxable income. .... .... .... 3. In 'Notes to Computation of Total Income', it has been mentioned in para 13 that amount of Rs. 48,85,74,591/- debited to P&L A/c under schedule 17 as 'Fixed Assets Written off' has been added back while computing taxable income for want of verification and supporting documents. From perusal of 'Computation sheet of Total Income' it becomes clear that this amount has not been added to taxable income. Thus income to extent of Rs. 4,85,74,591/- has escaped assessment for failure on part of assessee. 30. Therefore, all that reason (1) suggests is that there was failure on part of Assessee to compute and declare true taxable income; in reason (3) it is stated that income had escaped assessment for failure on part of Assessee . This does not satisfy requirement of Act. 31. What Ms. Bansal has sought to urge during course of W.P.(C) 7828/2010 Page 19 of 29 submissions before this Court is not even urged in counter-affidavit. All that is stated is that despite what Assessee has averred being prima facie in order, Revenue still needs to verify that fact. audited accounts were already available with AO and formed part of assessment record. They did not require re-assessment proceedings for purpose of such verification. In any event, Court declines to accept reasons (1) and (3) as being valid reasons for re- opening of assessment. 32. This was not case where AO could not have, from assessment record itself, gleaned information. Even at stage of hearing objections of Assessee to re-opening, AO could have realized mistake in re-opening assessment for these two reasons. 33. Turning now to Reason No. 2 which pertains to finance lease, actual reason for re-opening reads thus: 2. In para 4 to 'Notes to Computation of Total Income', following noting have been given: "Under Accounting Standard AS-19, issued by Institute of Chartered Accountants of India, assets acquired under financial lease are required to be capitalized in books of accounts. interest charges pertaining to finance lease payments are also debited to Profit and Loss Account. income tax provisions, however, allow lessee only to claim deduction for lease rentals and not to claim depreciation. Accordingly, in tax computation, company has claimed deduction of principal amount of Rs. W.P.(C) 7828/2010 Page 20 of 29 15,419,985/- paid towards lease rental during year and offered to tax depreciation debited to Profit and Loss Account." claim made in underlined portion is totally incorrect and against law. assessee has actually deducted amount of Rs.1,54,19,985/- from taxable income which is totally wrong as in case of financial lease any payment on account of principal is of nature of capital expenditure and is not deductible from profits. Thus income of Rs.1,54,19,985/- has escaped assessment for wrong claim on part of assessee. 34. Here again, apart from saying that Assessee made wrong claim, there is not even statement that there was any failure on part of Assessee to make full and true disclosure of all material facts necessary for assessment. What fresh tangible material is on basis of which AO has come to conclusion that income has escaped assessment is not even mentioned here. 35. AO has plainly overlooked jurisdictional requirement in terms of proviso to Section 147 even as regards Reason No. 2. Turning to counter-affidavit on this aspect, what is stated qua this reason too is, again, reproduction of same reason. Thereafter, it is stated as under: As per Accounting Standards AS-19, "finance lease rentals would be segregated into principal and interest, and charge to revenue statement would comprise of depreciation and interest". In notes to account para - 5, it has been declared that lease payment of Rs. 2,41,52,274/- has been made during year. assessee has debited interest charges of Rs. 87,32,289/- under head interest on finance leases in P& L A/c W.P.(C) 7828/2010 Page 21 of 29 and Rs. 1,54,19,985/- under head payment of lease (principal) for motor vehicles in computation of income. claim made in underlined portion is totally incorrect and against law. assessee has actually deducted amount of Rs. 1,54,19,985/- from taxable income which is totally wrong as in case of financial lease any payment on account of principal is of nature of capital expenditure and is not deductible from profits. Thus income of Rs. 1,54,19,985/- has escaped assessment for wrong claim on part of assessee. issue regarding reduction of payment of lease rental (principal) in computation of income, by assessee was not considered by AO during assessment proceedings u/s 143(3). 36. Court finds that there has been full disclosure of all material facts of Assessee. In original assessment proceedings itself, Assessee clearly sets out basis for difference in accounting treatment of finance lease and tax treatment. It was explained by Assessee in accounts itself that under mandatory accounting standard (AS-19) issued by Institute of Chartered Accountants, assets acquired under finance lease were required to be capitalized in books of accounts of lessee. In AY in question, Assessee had incurred financial lease rent expenditure on motor vehicles taken on finance lease. difference was, as far as Act is concerned, for purposes of tax treatment. lessee was allowed only to claim deduction for lease rent in respect of leased assets and not claim depreciation. Consequently, for purposes of accounting treatment as mandated by AS-19, Assessee capitalized value of motor vehicles taken on lease and showed finance lease account payable as secured loan in its books of accounts. While interest on W.P.(C) 7828/2010 Page 22 of 29 said amount was directly debited to Profit and Loss Account and claimed as deduction in computation of taxable income, principal portion of finance lease rent paid by Assessee reduced finance lease liability that was not debited to Profit and Loss Account. As part of accounting treatment, depreciation was debited to Profit and Loss account. For purposes of tax treatment, however, depreciation was in fact added back. Assessee separately claimed principal portion of leased rent. 37. Assessee was guided by Circular No. 2 of 2001 issued by Central Board of Direct Taxes ( CBDT ) which provided that AS-19 would have no implication on allowance of depreciation on assets under provisions of Act. All of this was already explained in original assessment proceedings and examined by AO. complete disclosure is made in balance sheet. Note 5 to accounts also explained this. In later AY i.e., AY 2005-06, AO again examined this issue and accepted explanation offered by Assessee. 38. Court is of view that Reason No. 2 is also, therefore, not valid reason for re-opening of accounts. 39.1 At this stage, it requires to be noted that in CIT v. Usha International Limited (supra), Full Bench of this Court by majority of 2:1 held that fresh tangible material need not be something external to assessment record. If there was material which formed part of assessment record which AO did not consider in first W.P.(C) 7828/2010 Page 23 of 29 instance, then such material, according to majority, would fall within scope of Section 147(b) of Act. 39.2 What is significant as far as said decision is concerned, is that original assessment was processed under Section 143. question was of re-opening assessment within 4 years of end of assessment order for AY in question. In fact questions formulated by Full Bench read as under: (i) What is meant by term "change of opinion? (ii) Whether assessment proceedings can be validly reopened under Section 147 of Act, even within four year, if assessee has furnished full and true particulars at time of original assessment with reference to income alleged to have escaped assessment and whether and when in such cases reopening is valid or invalid on ground of change of opinion? (iii) Whether bar or prohibition under principle change of opinion will apply even when Assessing Officer has not asked any question or query with respect to entry/note, but there is evidence and material to show that Assessing Officer had raised queries and questions on other aspects? (iv) Whether and in what circumstances Section 114 (e) of Evidence Act can be applied and it can be held that it is case of change of opinion? 39.3 It becomes clear from para 9 of said judgment that Court was discussing decision in CIT v. H.P. Sharma (1980) 122 ITR 675 (Del) which dealt with Section 147 as it stood prior to 1st April, 1989. This then led majority in para 10 of opinion to note that said decision was not dealing with Section 147 of Act as amended with effect from 1st April, 1989 but was with reference to W.P.(C) 7828/2010 Page 24 of 29 Section 147(b) of Act under which AO could re-open assessment on basis of information . 39.4 In para 11, Court noted that observations in Consolidated Photo and Finvest Ltd. v. ACIT (2006) 281 ITR 394 (Del) (FB). Court then summarized in para 13 (3) legal position as under: Reassessment proceedings will be invalid in case issue or query is raised and answered by assessee in original assessment proceedings but thereafter Assessing Officer does not make any addition in assessment order. In such situations it should be accepted that issue was examined but Assessing Officer did not find any ground or reason to make addition or reject stand of assessee. He forms opinion. reassessment will be invalid because Assessing Officer had formed opinion in original assessment, though he had not recorded his reasons. 39.5 reference in later part of said decision to Kalyanji Mavji and Co. v. CIT [1976] 102 ITR 287 (SC) appears to overlook fact that said decision was in context of Section 147(b) of Act as it stood prior to amendment with effect from 1st April, 1989. 39.6 Consequently, Court is of view that as pointed out by opinion of other member of Bench, R.V. Easwar, J. in Usha International Ltd. v. CIT, law declared by Full Bench of this Court in CIT v. Kelvinator of India Ltd. (2002) 256 ITR 1 (Del) (FB) which was upheld by Supreme Court is still good law and no watering down of said judgment would be permissible. As rightly pointed out by him, decisions in A.L.A. Firm v. CIT [1991] 189 ITR 285 (SC) was in context of Section 147(b) of Act as it stood W.P.(C) 7828/2010 Page 25 of 29 prior to 1st April, 1989 and case was predominantly concerned with question as to what would constitute information within meaning of Section 147(b) of Act. 40. In any event, as already pointed out, Reasons Nos. 1, 2 and 3 in present case do not offer sufficient justification for re-opening of assessment. 41. Even reason No. 4 is essentially about claim of deduction under Section 80-IB of Act. perusal of assessment order dated 17th February, 2006 reveals that there is separate discussion in said order under caption deduction under Section 80-IB. There is discussion of case law and facts of case. assessment order discussed basis for computation of royalty and notice that it is @ 30% of Indian published price. segmental breakup in fact was before AO. 42. When that matter travelled to CIT (A), remand report was called from AO. In his report dated 1st May, 2002 no adverse comments were made by AO in relation to written submissions of Assessee. CIT (A) in his order dated 18 th November, 2002 accepted registered disallowance on premise that activity of duplication did not amount to manufacture. As regards unit not being registered as industrial undertaking, this was not based on any fresh tangible material. Also, change of undertaking from Delhi to Gurgaon was already disclosed in report Form 10-CCB. objections as regards highly paid executives not being construed as W.P.(C) 7828/2010 Page 26 of 29 workers, again, appears to proceed on surmises and conjectures. 43. As pointed out by Assessee for subsequent AY 1995-96, Revenue has accepted that Assessee fulfils eligibility conditions under Section 80-IA and 80-IB of Act. fact that there was separate auditor in respect of Form 10-CCB for purposes of claiming deduction under Sections 80-IA and 80-IB has been acknowledged by Revenue itself. How all of this can go to deprive Assessee of deduction is not clear. In any event, jurisdictional requirement that there must be some tangible material warranting prima facie to belief that income has escaped assessment does not stand satisfied. reasons have no communication as to what was material fact which was not disclosed by Assessee during original assessment proceedings. audited accounts give explanation for cost of master copy. Again, order of AO reveals that issue was discussed at length. This cost was disallowed as capital expenditure to extent of Rs. 9,95,460. As regards comments of Auditor, entire relevant passage reveals that comments are in context of paras 2 (a) - (h) which cannot be acted upon by Assessee. In fact, in view of each of items of classification in Auditor s report, there is addition to Assessee s income in revised return. 44. Court is, therefore, satisfied that none of reasons for re- opening assessment satisfy legal requirement as stipulated in proviso to Section 147 of Act. W.P.(C) 7828/2010 Page 27 of 29 45. In this context, it must also be noted that issue concerning duplication of blank CD with master media amounting to manufacture was considered in Assessee s own case by Supreme Court in CIT v. Oracle Software India Ltd. (2010) 320 ITR 546 (SC). It was categorically held that processing of blank CDs, dedicating them to specific use, constitutes manufacture in terms of Section 80-IA(12)(b) read with Section 33B of Income Tax Act . It was further concluded by Supreme Court that marketed copies are goods and if they are goods then process by which they become goods would certainly fall within ambit of Section 80-IA(12)() read with Section 33B because industrial undertaking has been defined in Sectoin 33B to cover manufacture or processing of goods . This was for AYs 1995-96 & 1996-97. judgment of this Court for AYs 1994-95 & 1995-96, is reported in CIT v. Oracle Software India Ltd. (2007) 293 ITR 353 (Del). 46. As far as AY in question i.e., AY 2003-04 is concerned, order dated 1st September, 2009 of this Court in ITA No. 827/2009 was confirmed by Supreme Court by its order dated 22nd October, 2010 in SLP (CC) No. 15810/2010 (SC). So there have been consistent orders in case of Assessee itself for AYs 1994-95 and 2004-05. Court is, therefore, satisfied that even on rule of consistency, there was no justification in re-opening of assessment for AY 2003-04 on said ground as set out at (4) to (8) in reasons recorded by AO. Conclusion W.P.(C) 7828/2010 Page 28 of 29 47. For above reasons, writ petition is allowed and notice dated 31st March, 2010 issued by AO under Section 147 and 148 of Act for re-opening assessment for AY 2003-04 is hereby quashed. S.MURALIDHAR, J PRATHIBA M. SINGH, J JULY 26, 2017 b nesh/ anb W.P.(C) 7828/2010 Page 29 of 29 Oracle India Private Limited v. Assistant Commissioner of Income-tax, Circle 13(1), New Delhi