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Dy. Cit Vs. Ramnord Research Labs. (P.) Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
AppellantDy. Cit
RespondentRamnord Research Labs. (P.) Ltd.
Excerpt:
.....was made, which was incurred on repairs of the premises taken on leave and license basis.the assessing officer discovered that such expenditure could not have been allowed as revenue expenditure but is a capital expenditure. he reopened the assessment by recording following reasons : in the return of income filed, claim regarding deferred revenue expenditure of rs. 19,33,105 incurred on the premises taken on leave and licence basis has been allowed under section 37( 1) of the income tax act, 1961 whileprocessing the return under section 143(1)(9a). however, as per theprovisions of explanation j of sub-clause (1) of section 32 of the income tax act theexpenditure incurred on the premises taken on leave and licence basis isto be treated as capital expenditure. depreciation can be.....
Judgment:
1. These two appeals are against the order of Commissioner (Appeals) dated 21-1 -2002. One filed by the assessee bearing IT A No. " 1064/M/02 and the other filed by the revenue bearing ITA No. 1659/M/ 02. The issues in the two appeals are different but a preliminary objection has been raised by the learned counsel for assessee about the reopening of the assessment under Section 147, on the ground that there was no valid satisfaction.

2. The facts of the case are that assessment for assessment year 1996-97 was completed under Section 143(l)(a). In the return of income filed E originally, a claim of Rs. 19,33,105 was made, which was incurred on repairs of the premises taken on leave and license basis.

The assessing officer discovered that such expenditure could not have been allowed as revenue expenditure but is a capital expenditure. He reopened the assessment by recording following reasons : In the return of income filed, claim regarding deferred revenue expenditure of Rs. 19,33,105 incurred on the premises taken on leave and licence basis has been allowed under Section 37( 1) of the Income Tax Act, 1961 whileprocessing the return under Section 143(1)(9a). However, as per theprovisions of Explanation J of Sub-clause (1) of Section 32 of the Income Tax Act theexpenditure incurred on the premises taken on leave and licence basis isto be treated as capital expenditure. Depreciation can be claimed if thesaid premises are owned by the assessee. The allowance of the claim of thedeferred revenue expenditure of Rs. 19,38,105 under Section 37(1) hasresulted in under assessment of income.

3. Thereafter proceedings under Section 143(2) took place and various other additions were made by the assessing officer in addition to disallowance of the impugned expenditure. The Commissioner (Appeals) confirmed the reopening under Section 147 on the ground that so long as ingredients of Section 147 are fulfilled, the failure to take action under Section 143(2) will not render the assessing officer powerless to initiate the re-assessment proceedings, where intimation under Section 143(1) has been issued.

4. Before us, learned counsel for assessee submitted that reopening is bad in law for the following reasons : (i) The reasons framed by the assessing officer presumes that explanation of sub-clause of Section 32 provides that expenditure incurred on the premises taken on leave and licence basis is to be treated as capital expenditure. This formation of belief is patently incorrect in law. Explanation 1 of Section 32(1) on the other hand provides that where a premises has been taken on leave and license basis then for the purpose of providing depreciation on the capital expenditure incurred by an assessee on such premises, he will be deemed to be an owner. The explanation nowhere presumes that expenditure incurred on premises taken on leave and license basis would be capital in nature.

(ii) There is no satisfaction of the assessing officer in the recorded reasons that income has escaped assessment either because of omission or failure on the part of the assessee to disclose all the facts truly and fully/or because of some other reasons.

(iii) The assessee never understated the income or claimed any excessive loss or deduction or allowance or relief in the return. In any case, no such allegation has been made by the assessing officer in thereasons. Notwithstanding, there is no basis for presuming thatexpenditure incurred by the assessee on renovation on premisesEtaken on leave and license basis would be capital expenditure.

(iv) As per the decision of Hon'ble Bombay High Court in HindustanLever Ltd. v. R.B. Wadkar Asstt. CIT ', the reasonsare required to be read as they were recorded by the Assessing Officer. No deletion is permissible. No addition can be made to those reasons. No inference is allowed to be drawn based on reasons not recorded. It is for the assessing officer to disclose and open his mind in the reasons recorded by him. He has to speak through his reasons.N.D. Bhatt, Inspecting Asstt. Commissioner v. IBM World Trade Corpn. , Hon'ble Bombay High Court held that for examining the validity of reopening, only the reasons so recorded can be looked into. The same issue was also considered by Hon'ble ITAT, Bangalore in Renuka Travels v. ITO (1998) 66 ITD 143, wherein it was held that there may be fact that the assessing officer has not recorded reasons for reopening of assessment but if assessing officer did not make any such recording of the fact for reopening of assessment, the reopening would not be valid.

(v) Thus, the learned counsel for assessee argued that the reopening is bad in law and entire re-assessment is required to be declared as invalid.

5. On the other hand, the learned DR submitted that there has been change in the law after 1-4-1981. The reopening of assessment has been made easy. In respect of assessment completed under Section 143(l)(a), the assessing officer is not required to establish on record that income has escaped assessment on account of failure on the part of assessee to disclose truly and fully all material facts necessary for assessment. Therefore, in the present case, the expenditure incurred by the assessee was capital in nature and it was claimed as revenue. There we is an excessive claim and it fulfils requirement of reopening under Section 147. He thus, supported the order of authorities below.

6. We have heard the rival submissions and considered the facts and material on record. We have also carefully considered the case laws cited by the parties. In our view, the reasons recorded by the assessing officer are not legally valid to sustain the reopening. The only ground the assessing officer has taken to reopen the assessment is that Explanation1 to Section 32(1) provides that expenditure incurred on the premises taken on leave and licence basis has to be treated as capital expenditure. He, further, adds that the depreciation can be claimed if the said premises are owned by the assessee. This is factually and legally incorrect. Explanation 1 to Section 32(1) is as under:- (copy from Act) (Explanation 1.Where the business or profession of the assessee is carried on in building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.) 7.(i) According to the above, where business of the assessee is carried out in a building; (ii) in respect of which assessee holds a lease or other right of occupancy; (iii) any capital expenditure is incurred thereon for construction of any structure or doing any work therein by way of renovation, extension, improvement, then for the purposes of claiming depreciation in block of asset, the said structure or work would be treated as a building owned by the assessee.

8. Thus, a fiction is created whereby capital expenditure incurred on rented premises, taken on lease, will be treated as a building owned by the assessee. Thus, the argument of learned counsel for assessee is correct that this explanation does not provide that expenditure incurred on a premises taken on leave and licence basis will be treated as capital expenditure. Thus, the basic premises on which reopening has been done by the assessing officer is legally incorrect. Even otherwise, the learned DR could not point any decision or any well-settled proposition, which would consider the expenditure on rented premises or premises taken on leave and licence basis and treat it as a capital expenditure. In fact, no asset is created in favour of the assessee. It was for this difficulty that deeming fiction by way of explanation to Clause (1) to Section 32 was created whereby assessee would be deemed to be owner of the building to the extent of capital expenditure incurred by him. We also find that Tribunal in assessee's own case held on this issue in the assessment years 1997-98 & 1998-99 that said expenditure cannot be treated as capital expenditure as assessee does not own the premises. Secondly, we also find that the assessing officer has not made any charge that income has escaped assessment. For resorting to Section 147, it is necessary and incumbent on the assessing officer to make clear in the reasons recorded that income has escaped assessment. Therefore, sufficiency of material or sufficiency of escapement of income would not be relevant but what is relevant and crucial is the charge levied by the assessing officer that income has escaped assessment and this charge must have proximate nexus with the information or material on the basis of which he has reasons to believe. In this particular case, the basis for coming to conclusion that a sum of Rs. 19,03,105 should be treated as capital expenditure is based on interpretation of Explanation, which on the face of it is incorrect. No opinion could have been formed on the basis of such interpretation. Thus, not only the basic charge of escapement is missing from the reasons recorded by the assessing officer, the basis for reopening is also legally incorrect.

9. We find support from the decision of Hon'ble Bombay High Court in Hindustan Lever Ltd. 's case (supra), N. D. Bhatt's case (supra) and Renuka Travels' case (supra) that for examining the validity of reopening, we have to see only the reasons and nothing more or nothing beyond. The reasons must show some material and that material must have proximate relationship with escapement of income. There should be a clear charge of escapement of income apparent from the reasons recorded. The question of looking into subsequent condition that whether such escapement is due to omission or failure of assessee for not disclosing truly and fully material facts necessary for assessment, or for some other reasons has to be examined only subsequently. In view of this and on the basis of the decision of Hon'ble Bombay High Court in Hindustan Lever Ltd's case (supra) we hold that reopening of assessment is bad in law and is, therefore, quashed. This ground of assessee is, therefore, allowed.

10. Notwithstanding the decision that reopening of assessment is bad in law, let us consider the case on merits. In the ground of appeal, the first issue is about treating leave and licence fee as income from house property as against business income. We find that similar issue had come up in assessee's own case in assessment year 1995-96 in ITA No. 770/M/ A 99 (para 8) decided on 28-7-2004; in assessment year 1997-98 in ITA No. 4754/M/2000 (para 9) decided on 25-4-2005 and in assessment year 1998-99 in ITA No. 820/M/02 (para 5) decided on 29-6-2005. In all three years, the issue has been decided in favour of the assessee. Since facts and circumstances being the same, following above orders of the Tribunal, we decide the issue in favour of the assessee. This ground of the assessee is allowed.

11. Second issue is about disallowance of expenditure on repairs to premises taken on leave and licence basis. This issue has been decided in favour of the assessee by the Tribunal in assessee's own case in the assessment year 1997-98 (ITA No. 4754/M/2000 para 5 decided on 25-4-2005) and assessment year 1998-99 (ITA No. 1005/M/02, para 2 decided on 12-8-2005). Since facts and circumstances being the same, following above orders of the Tribunal, we decide the issue in favour of the assessee. This ground of the assessee is allowed.

12. The third issue is to allow 1/5 depreciation on let out premises.

Since in ground No. 2, we have held that income should be assessed under the head business, as a natural consequence, the depreciation has to be allowed. This ground of the assessee is, therefore, allowed.

14. The first issue is about deleting the addition on account of value of alleged unaccounted silver recovery on film processing. This issue has been decided in favour of assessee in assessment years 1995-96, 1997-98, 1980-81,1982-83 to 1984-85 & 1989-90. Following the above order, as facts and circumstances of the case remain the same, we decide the issue in favour of the assessee. This ground of revenue is, therefore, rejected.

15. The second ground is about deleting the addition on account of saving of raw films. This issue is covered by earlier decisions of Tribunal in assessment years 1974-75 to 1976-77,1980-81,1982-83,1983-84& 1984-85 in ITA Nos. 4847/B/85, 5026/B/83, 982 to 984/B/88, 1767 to 1769/B/88 in favour of the assessee. In subsequent years also i.e. Assessment Year 1995-96 in ITA Nos. 729/M/99, for assessment year 1997-98 in ITA No. 4625/M/2000 and in assessment year 1998-99 in ITA No. 1005/M/02, the issue was decided in favour of the assessee. Since facts and circumstances being the same, following above orders of the Tribunal, we decide the issue in favour of the assessee. This ground of the revenue is rejected.

16. The third ground is about deleting the notional interest income of security deposit. This issue had also cropped up in assessment year1995-96 in ITA Nos. 729/M/99, for assessment year 1997-98 in ITA No. 4625/M/2000 and in assessment year 1998-99 in ITA No. 1005/M/02,the issue was decided in favour of the assessee. Since facts and circumstances being the same, following above orders of the Tribunal, we decide the issue in favour of the assessee. This ground of the revenue is rejected.

17. The fourth ground is about deleting the addition on account of expenditure incurred on repairs to leasehold premises. In assessment year 1997-98 in ITA No. 4625/M/2000 and in assessment year 1998-99 in ITA No. 1005/M/02, the issue was decided in favour of the assessee.

Since facts and circumstances being the same, following above orders of the Tribunal, we decide the issue in favour of the assessee. This ground of the revenue is rejected.

18. The last ground of the revenue is that Commissioner (Appeals) has treated sale of shares as capital gains instead of speculation income.

It is claimed by the assessee that sale or purchase transaction had taken place as investment and not as stock in trade. The Commissioner (Appeals) had reversed the finding of the assessing officer and held that assessee had held shares as investment and not as a part of stock in trade. Since, this finding of Commissioner (Appeals) is not controverted, we uphold his decision that income from sale and purchase of shares is taxed under the head 'Capital gains'. In view of this, this ground of revenue is also rejected.

19. Finally, the appeal filed by the assessee is allowed and that filed by revenue is dismissed.


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