Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 06.08.2020 CORAM HONOURABLE DR.JUSTICE VINEET KOTHARI & HONOURABLE MR.JUSTICE KRISHNAN RAMASAMY T.C.A.No.470 of 2017 Principal Commissioner of Income Tax 6 No.63, Race Course Road, Coimbatore. ... Appellant Versus M/s. Vijayeshwari Textiles Ltd., (Now M/s.VTX Industries Ltd), No.10/400, Palaghat Road, Kuniyamuthur, Coimbatore 641 008. PAN:AAA CV 6388 F ... Respondent Prayer: Tax Case Appeal filed under section 260A of Income Tax Act, 1961 against order of Income Tax Appellate Tribunal Madras, 'D' Bench dated 31.1.2017 in ITA No.3176/Mds/2016 For Appellant : Mr.T.R.Senthilkumar, Senior Standing Counsel For Respondent : Mr. R. Venkatnarayanan for Mr.Subbraya Aiyar Padmanaban ----- 1/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] JUDGMENT (Delivered by Mr.KRISHNAN RAMASAMY, J.) Court was held by Video Conference, as per Resolution of Full Court dated 3 July 2020, by Judges at their respective residences and counsel, staff of Court appearing from their respective residences. 2. Heard Mr.T.R.Senthilkumar, learned Senior Standing Counsel appeared for Appellant/department and Mr.R.Venkatnarayanan, for Mr.Subbraya Aiyar Padmanaban, learned counsel appeared for respondent/assessee. 3.The appellant filed present appeal by suggesting following substantial questions of law:- 1.Whether ITAT is correct in law in quashing reassessment order made under Section 143(3) r/w S. 147 of Income Tax Act, on ground that reassessment initiated after four years and no fresh material on record for such reassessment proceedings? 2/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] 2.Whether ITAT is correct in law in quashing reassessment order without considering Explanation 1 and Explanation 29(c) to Section 147 of Income Tax Act? 3.Whether Appellate Tribunal was right in law in deleting reassessment when assessee has amortized portion of product development expenditure and balance amount was claimed as deferred revenue expenditure, but same was not debited in profit & loss account which is against law? 4. appellant has filed present appeal, aggrieved by order of Income Tax Appellate Tribunal (ITAT) dated 31.1.2017 made in ITA No.3176/Mds/2016. 5. Learned counsel for appellant/department submitted that appellant/department issued notice under Section 148 of Income Tax Act, 1961, (in short Act ) on 11.06.2013 for re-assessment under Section 147 of Act. counsel referred to Explanation 2(c)(iii) of Act which reads as follows:- If [Assessing] Officer... assessment year concerned. 3/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] Explanation 1- Production before Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by Assessing Officer will not necessarily amount to disclosure within meaning of foregoing proviso. Explanation 2- For purpose of this Section, following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:- (a) Where no return............................................................................... ......................................................................chargeable to income tax; (b) Where return of income............................................................................. ...................................allowance or relief in return; .................................................................required under Section 92E], (c) Where assessment has been made, but- (i) income chargeable to tax has been under assessed.........; or (ii) such income.................................................................; or (iii) such income has been made subject of 4/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] excessive relief under this Act................or (iv) excessive.................................Act has been computed] 6. By referring to above Section, learned counsel submitted that department is empowered to make re-assessment under Section 147, in case, income chargeable to tax has escaped assessment i.e., such income has been made subject of excessive relief. In present case, according to department, total product development expenditure was sum of Rs.3,39,27,315/-. Out of said amount, sum of Rs.1,33,49,000/- was amortized towards product development expenditure and balance of Rs.2,65,78,000/- was claimed as deferred revenue expenditure, which is not allowable for deduction. However, Assessing Officer wrongly allowed deduction. Therefore, notice under Section 148 was issued for making re-assessment in terms of Explanation 2(c)(iii) of Section 147 of Act, by Deputy Commissioner of Income Tax and passed assessment order on 19.03.2015. He has also referred relevant portion of assessment order which reads as under:- 5/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] Secondly, as per sub-clause (i) of clause (c) of Explanation 2 under Section 147 excessive under assessment of income chargeable to tax can be construed as escapement of income. In view of above, re-opening of assessment is as valid and holds well in eyes of law. 5. Further, it is seen tht sum of Rs.3,99,27,000/- has been claimed as deferred revenue expenditure in computation of income statement. However, in profit and loss account assessee has amortized sum of Rs.1,33,49,000/- of product development expenditure and claimed as expenditure. balance amount of Rs.2,65,78,000/- has been claimed as deferred revenue expenditure. Any expense not debited to profit and loss account is not allowable while computing total income of assessee. Hence, this expenditure of Rs.2,65,78,000/- is disallowed and added back to total income. 7. counsel further submitted that against said re-assessment order, assessee preferred appeal before Commissioner of Income Tax (Appeals) I, Coimbatore. Commissioner of Income Tax (Appeals) I, without appreciating all these facts narrated in re- assessment order passed under Section 147, allowed appeal by holding 6/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] as follows:- 5. I have considered assessment order and written submission of assessee. It was found that during original assessment proceedings, notice u/s 142(1) was issued calling for certain details which included copy of product development expenses account, bills and vouchers, thereof and nature of product developed along with note on product development expenditure. details were submitted by assessee vide letter dated 30.01.2010 along with separate detailed note on nature of product development expenditure. Assessing Officer has accepted contentions of assessee and passed assessment order dated 31.12.2010. Subsequently, assessment was re- opened by issuing notice u/s 148 on 11.06.2013. reason given for re-opening is that any expenditure not included in Profit and Loss Account is not allowable and this was noticed only after completion of assessment. 6. In reassessment order dated 19.03.2015, in para 4(a) it is mentioned that After completion of assessment only it is noticed that assessee has amortized portion of product development expenditure and balance amount was claimed as 7/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] deferred revenue expenditure. assessee has deducted this amount while computing total income, even though same was not debited to profit and loss account which is not correct . 7. It could be clearly seen that assessee has given entire material facts on issue of product development expenditure during original assessment proceedings itself and failure to produce full and true disclosure of facts during original assessment proceedings has not been proved by Assessing Officer. It has to be accepted that, when Assessing Officer has raised issue or query and assessee has answered query in original assessment proceedings itself and Assessing Officer has not made any addition, issue has been examined and there is no failure on part of assessee to disclose facts during original assessment proceedings. 8. As Assessing Officer has not brought any new material on record warranting reopening of assessment after four years. reopening of assessment is only on account of change of opinion of Assessing Officer. Hence, issue of notice u/s 148 after four years from end of Asst. Year 2007-08 is without jurisdiction and 8/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] invalid. When reopening is invalid, additions made does not stand test of scrutiny and therefore stands deleted in hands of appellant . 8. Aggrieved by order of Commissioner of Income Tax (Appeals), appellant/department preferred appeal before Income Tax Appellate Tribunal (ITAT), Chennai. However, Tribunal also refused to accept contention of appellant/department and dismissed appeal and held as follows:- 5. We have carefully gone through provisions of Section 147 of Act. When Assessing Officer has completed assessment under Section 143(3) of Act, completed assessment cannot be reopened under Section 147 of Act unless there was negligence on part of assessee, after expiry of period of four years from end of relevant assessment year. In this case, four years period from end of relevant assessment year expired on 31.03.2012. However, Assessing Officer issued notice under Section 148 of Act only on 11.06.2013. Therefore, obviously, assessment was reopened after expiry of four years from end of relevant assessment year. 9/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] assessee admittedly filed Profit and Loss account and other details which are required for completing assessment. Therefore, it cannot be said that there was any negligence on part of assessee. Merely because Assessing Officer could not examine Profit and Loss account filed by assessee in course of regular assessment, that cannot be reason to say that assessee has not filed relevant details. This Tribunal is of considered opinion that when assessee provided all relevant details before Assessing Officer and Assessing Officer has also completed assessment under Section 143(3) of Act, it cannot be said that there was any negligence on part of assessee. Therefore, reopening of assessment beyond period of four years from end of relevant assessment year is outside scope of Section 147 of Act. In view of above, this Tribunal do not find any reason to interfere with order of lower authority and accordingly same is confirmed. 9. learned counsel for department further submitted that in present case, assessment order was made on 31.12.2010, notice 10/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] under Section 148 was issued on 11.06.2013 and re-assessment proceedings was initiated by department within period of limitation. Further, he submitted that Assessing Officer has rightly invoked provision under section 147 of Act for re-assessment, since assessee sought excessive relief under Act. assessee has debited in profit and loss account sum of Rs.1.33 crore as product development expenditure, whereas assessee had taken Rs.3.39 crore as deduction for purpose of computing income for payment of Income Tax. According to him, whatever amount is shown in profit and loss account alone can be permitted to be deducted for purpose of computing Income Tax. All these facts were not considered by both Commissioner of Income Tax (Appeals) I, Coimbatore as well as Income Tax Appellate Tribunal. Therefore, he pleaded before this Court that orders passed by Commissioner of Income Tax (Appeals) - I, Coimbatore, as well as Income Tax Appellate Tribunal have to be set aside. 10. Per contra, learned counsel for respondent submitted that assessee had spent sum of Rs.3.39 crore, during relevant 11/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] assessment year 2007-08 towards product development expenses. There is no dispute on either side with regard to revenue nature of expenditure. While so, assessee is entitled to deduct whole amount while making calculation for purpose of payment of Income Tax. In present case, assessee has debited sum of Rs.1.33 crore in profit and loss account for year ending 31.03.2007 towards amortization of 1/3rd amount of product development expenses, relating to previous financial year ending 31.03.2006 relevant to assessment year 2006-07. Therefore, both Commissioner of Income Tax (Appeals) I, Coimbatore, as well as Income Tax Appellate Tribunal have appreciated these facts and held that entire amount of Rs.3.39 crores spent by assessee towards product development expenses during current year is revenue expenditure and that assessee is entitled for deduction of entire amount. 11. Further, counsel for assessee submitted that apart from merits of case, present appeal is also barred by limitation since notice under Section 148 was issued beyond period of limitation. That apart, during course of original assessment and at time of 12/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] scrutiny, all these facts were disclosed and relevant particulars were also furnished, but same were not considered by Assessing Officer. Therefore, he submitted that there is no justification in reopening assessment under Section 147 of Act, as there is no income on part of assessee relating to Income Tax, which had escaped from assessment. Hence, he prayed for dismissal of appeal. 12. We have given due attention to submissions made by both counsel and perused material available on records. 13. present dispute is relating to assessment year 2007-08. assessee company has filed its return for assessment year 2007-08 on 13.11.2007, declaring total loss of Rs.62,77,473/-. Subsequently, case was taken up for scrutiny and notice under Section 143(2) of Income Tax Act was issued on 03.09.2009. assessment was completed under Section 143(3) of Act on 13.12.2010 determining total income at Rs.15,76,55,602/-. During course of scrutiny, Assessing Officer called for several details and all information were furnished by assessee. Assessing Officer pointed out certain mistakes and 13/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] therefore, order made under Section 143(3) was modified and rectification order was passed on 19.04.2012. notice for reassessment was issued under Section 148 on 11.06.2013. It is to be noted that in present case, return was filed on 13.11.2007 for assessment year 2007-08, for which reassessment proceedings under sections 147 and 148 ought to have been initiated within period of four years, which was over by 31.03.2012. But, notice for reassessment proceedings under Section 148 was issued on 11.06.2013, beyond period of limitation. Therefore, we do not find any error in finding of Income Tax Appellate Tribunal in this aspect. 14. Another contention of department was that product development expenses incurred during year was sum of Rs.3.39 crore and it cannot be deducted during year since in profit and loss account assessee has shown only sum of Rs.1.33 crores. We have gone through materials on record and we are not in position to accept submissions made by appellant/department for following reasons.- (a) Both department as well as assessee had accepted sum 14/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] of Rs.3.39 crore spent towards product development expenditure as revenue expenditure, relevant to assessment year 2007 08. (b) Further, we noticed that sum of Rs.4 crores was spent by assessee towards product development expenditure during assessment year 2006-07. assessee has amortized 1/3rd of product development expenditure of previous year, namely sum of Rs.1.33 crore and debited in profit and loss account during assessment year 2007-08. But, assessee has deducted entire amount of Rs.4 crores towards product development expenditure of previous year relevant to assessment year 2006 07, while determining income for purpose of computing income tax. Therefore, assessee is entitled for deduction and department cannot have any objection for same. Therefore, in previous year relevant to assessment year 2007 - 08, though sum of Rs.1.33 crore was debited towards product development expenditure in profit and loss account, said amount was rightly added by assessee, while computing income for payment of income tax. Therefore, we do not find any error on this aspect. (c) assessee had spent further sum of Rs.3.39 crore towards 15/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] product development expenditure during assessment year 2007-08. said amount being revenue expenditure, assessee has deducted it while computing income for purpose of income tax. This computation was allowed in original assessment order. Before completion of original assessment, scrutiny was also made and assessee has furnished all particulars demanded by Assessing Officer. After thorough scrutiny of all materials available with Assessing Officer, original assessment was made. Therefore, no material was concealed by assessee and hence, we do not find any justifiable reason to reopen assessment under Sections 147 and 148 of Act. (d) Further, perusal of reassessment order made under Section 147 would make it clear that Assessing Officer has stated that assessee has only shown sum of Rs.1.33 crore as product development expenditure under profit and loss account and therefore, assessee is entitled to claim income tax benefit only to extent of Rs.1.33 crore and hence, he disallowed sum of Rs.2.6 crores (3.39-1.33). It is highly shocking to see method of calculation made during re-assessment under Section 147, as same is without any basis. assessee in his reply has clearly stated that sum of Rs.1.33 crore is relating to 16/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] previous year, which is 1/3rd of product development expenses for which they are amortizing this year. As assessee had deducted its entire amount of Rs.4 crores towards product development expenditure, while computing income tax during year 2006-2007, it has rightly added while computing income for income tax purpose. That apart, since assessee has incurred sum of Rs.3.39 crores towards product development expenditure during assessment year 2007-2008, as same is revenue in nature, it has deducted entire amount, while computing income tax. (e) We do not see any error in deduction made by assessee and we could only find lack of understanding on part of Assessing Officer during course of reassessment under Section 147. Unless revenue authorities are well versed with accounts, these types of problems would be arising at all times. 15. All submissions made by department are relating to facts which both Commissioner of Income Tax (Appeals) I, and Income Tax Appellate Tribunal have elaborately discussed and Tribunal has also given its findings as stated supra. 17/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] 16. In our considered opinion, product development expenditure incurred to extent of Rs.3.39 crore by assessee, is entitled to be amortized over period of three years as per accounting practice adopted by Company and assessee has rightly amortized same. 17. Further, we are of clear view that re-assessment provisions under Section 147 of Act do not provide for reassessment on mere change of opinion. re-assessment on mere of change of opinion is not permissible under law. Such change of opinion amounts to review of order of assessment, which is not permissible under law. In support of our opinion, we would like to press into service Judgment of Hon'ble Supreme Court in case of Commissioner of Income Tax, Delhi Vs. Kelvinator of India Ltd., reported in (2010) 187 Taxman 312 or 320 ITR 561 (SC). extract of relevant Paragraph No.4 which reads as follows:- 4.On going through changes, quoted above, made to Section 147 of Act, we find that, prior to direct Tax laws (Amendment) Act, 1987, re- opening could be done under above two conditions 18/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] and fulfilment of said conditions alone conferred jurisdiction on Assessing officer to make back assessment, but in Section 147 of Act [with effect from 1-4-1989], they are given go-by and only one condition has remained, viz., that where Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open assessment. Therefore, post 1-4-1989, power to reopen is much wider. 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 reopen. 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 reassess. But 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 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 1-4-1989, Assessing Officer has power to 19/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] reopen, 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. Our view gets support from changes made to section 147 of Act, as quoted hereinabove. Under Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted words reasons to believe but also inserted word 'opinion' in section 147 of Act. However, on receipt of representations from Companies against omission of words reason to believe , Parliament re-introduced said expression and deleted word opinion on ground that it would vest arbitrary powers in Assessing Officer. We quote herein below relevant portion of Circular No.549, dated 31.10.1989, which reads as follows:- 7.2. Amendment made by Amending Act, 1989 to reintroduce expression 'reason to believe' in section 147.- number of representations were received against omission of words 'reason to believe' from section 147 and their substitution by 'opinion' of Assessing Officer. It was pointed out that meaning of expression, 'reason to believe' had been explained in number of court rulings in past and was well settled and its omission from section 20/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] 147 would give arbitrary powers to Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, Amending Act, 1989, has again amended section 147 to reintroduce expression 'has reason to believe' in place of words 'for reasons to be recorded by him in writing , is of opinion'. Other provisions of new section 147, however, remain same. 18. In view of reasons stated above, we do not find any question of law for arising for our consideration in present case and we do not find any irregularity or illegality in order passed by both Commissioner of Income Tax (Appeals) I, Coimbatore, and Income Tax Appellate Tribunal. Hence, present appeal filed by appellant/department deserves to be dismissed. 19. In result, Tax Case Appeal is dismissed and questions framed above in present appeal filed by Revenue are answered against Revenue and in favour of Assessee. No costs. [V.K., J.] [K.R., J.] 06.08.2020 klt 21/22 http://www.judis.nic.in Order dt.21.7.2020 in T.C.A No.470 of 2017 [PCIT v. M/s. Vijayeshwari Textiles Ltd.] DR. VINEET KOTHARI, J. and KRISHNAN RAMASAMY, J. klt T.C.A.No.470 of 2017 06.08.2020 22/22 http://www.judis.nic.in Principal Commissioner of Income-tax 6, Coimbatore v. Vijayeshwari Textiles Ltd., (Now VTX Industries Ltd.)