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