Full Judgment Text
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on: 17.01.2017
+ W.P.(C) 8163/2010
HCL TECHNOLOGIES LTD. ..... Petitioner
Through : Sh. Ajay Vohra, Sr. Advocate with Ms.
Kavita Jha and Sh. Vaibhav Kulkarni, Advocates.
versus
ASST. COMMISSIONER OF INCOME TAX AND ANR.
..... Respondents
Through : Ms. Lakshmi Gurung, Jr. Standing
Counsel.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
%
1. The petitioner questions a notice issued by the respondents (hereafter
“the Revenue”) under Sections 147/148 of the Income Tax Act (hereafter
“the Act”) proposing to reopen the completed assessment for 2005-2006.
The earlier assessment had been framed under Section 143 (3) of the Act.
th
The notice that the petitioner questions was issued on 4 March, 2010; the
scrutiny assessment (“original order”) was made by the Assessing Officer
th
(“AO”) on 26 December 2008 at a net taxable income of 2,16,07,60,309/-
`
allowing a deduction under Section 10A of the Act, to the extent of
` 2,20,93,33,432/-.
W.P.(C) 8163/2010 Page 1 of 6
2. The petitioner is assessed to income tax and is engaged in the business
of development and export of computer software and ITES services. It filed
its return of income for AY 2005-06 on 31.10.2005 whereby it declared an
income of Rs.18,95,23,990/- under normal provisions of the Act. The
original return claimed a deduction under Section 10A of the Act to the tune
of Rs.2,57,24,87,070/- which was supported by the Chartered Accountant’s
certificate in Form 56F. However, the petitioner filed a revised return in
March, 2007 declaring an income of Rs.1,17,48,138/-. This time, it claimed
deduction under Section 10A at Rs.2,75,57,24,990/-. The AO, by notice of
22.10.2007 raised specific question and called for information with respect
to the deductions claimed under Section 10A which included details of
income and all expenditure. The petitioners furnished the details of
information sought on 14.11.2007. The AO, after examining the revised
returns, the audited accounts and other relevant documents accompanying
the return as well as the response of the petitioner accepted the deduction
claimed under Section 10A and completed the original assessment by
making the order on 26.12.2008. He determined net taxable income of
Rs.2,16,07,60,309/-. This he did after allowing a deduction under Section
10A at Rs.2,20,93,33,432/-. On 04.03.2010, the Revenue issued the
impugned notice proposing to reassess the income. The petitioner filed its
response and elicited a copy of the “reasons to be recorded”. The reasons to
be recorded in support of the reassessment notice was thereafter furnished.
The material part of the reassessment notice says that the assessee had not
exercised the option to non-applicability of provisions of Section 10A and
did not file the declaration.
W.P.(C) 8163/2010 Page 2 of 6
3. The reassessment notice alleged that the petitioners’ claim for setting
off losses in the STP units as against the income and profits of other units,
was unwarranted and that it should have made a declaration to the effect
under Section 10A (8) rather than claiming it under Form 56F. It was
besides, contended in the notice that Section 70/71 of the Act were not
structured to allow such set off. The second ground claimed for reopening
the completed assessment was that the software licensing fee paid by the
assessee could not have been validly allowed as revenue expenditure, under
Section 37 as it fell in the capital field. The petitioner objected to both these
reasons, pointing out that the AO, in the original proceeding, by specific
nd
queries as well as through the questionnaire issued on 22 November 2007,
had sought all these details. It was also contended that there was no failure to
disclose material facts or information, and furthermore, that the software
licensing expenditure was legitimate revenue expense. The petitioners’
objections, were, however, rejected. It has, therefore, approached this court.
4. The petitioner argues that all relevant particulars were furnished
during the original proceedings and that the original order took note,
exhaustively of the material facts. It was pointed out that the P/L accounts
filed with the revenue at that point in time, contained specific notes with
respect to treatment of the separate units. Furthermore, the losses/profits as a
whole of the Section 10A units, after due computation, were claimed as a
deduction in the returns, which is in conformity with the text of the law and
decisions of various courts. Learned counsel urged that the impugned
reassessment notice is nothing but a review, which is not allowed, in terms of
Section 147/148 having regard to the judgments of the Supreme Court. As
W.P.(C) 8163/2010 Page 3 of 6
regards the question of software license is concerned, it was argued that
though the revenue claims that it falls in the capital stream, there is nothing
to show, prima facie that a license fee as opposed to consideration for
acquisition of an asset, was ever paid.
5. Counsel for the revenue argued that the petitioner assessee was bound
to treat the accounts of the Section 10A units separately, which it did not and
that consequently, the reassessment notice was legal and justified. It was
submitted that Sections 70 and 71 do not permit set off of losses or profits
from Section 10A units with normal losses or profits and therefore, the relief
claimed and granted originally, was premised on flawed understanding,
based on concealment of facts. It was urged that once the revenue unearths a
misrepresentation or misstatement of facts, it is empowered to re-open a
completed assessment. Counsel also urged that the AO’s original order
merely discussed the correctness of the petitioners’ claim in respect of 31
units, as against 13 licensed units and disallowed that plea. The emphasis
was not on the admissibility or otherwise of the set off, which was a material
fact, but which escaped scrutiny. Counsel also submitted that the software
license fee clearly resulted in a capital advantage as it resulted in an asset of
enduring nature. The AO erred in allowing that claim.
6. It is evident from the above discussion that the issue here is whether
the revenue’s impugned notice satisfies the test of “tangible material”
discerned or made available. The jurisdictional precondition to invoke the
power under law is that the AO must have reasons to believe, on the basis of
materials, (implying thereby some material not existing on record) which
point to illegality or withholding of information, or presentation of
W.P.(C) 8163/2010 Page 4 of 6
inaccurate particulars, by the assessee. In the present case, the "reasons to
believe" are a recital of events, including the previous order of assessment,
which permitted the deduction, the assessment order after scrutiny. The
notice does not anywhere indicate what was the new material which came to
light, that threw into focus the fact that the assessee's behavior in not
disclosing material particulars, attracted the provision under Section
147/148. The order of the AO contains an insight into the fact that there was
an inquiry into the Section 10A claim; in fact, the assessee has placed on
record a letter written to the AO, containing replies to the queries in respect
th
of the deduction claim, dated 14 November, 2007. The AO did not rest
content with this, and made more specific queries by a questionnaire
containing as many as 40 queries: more than 10 of which related to the
Section 10A claim. The petitioner furnished its response to these. It was after
considering these materials, that the AO passed the original order. That order
did not interestingly grant the petitioner all the relief claimed; it was based
on a scrutiny of the law and the facts. To say that the AO ignored, or that the
petitioner did not disclose that losses could not be set off against non-Section
10A units, is entirely misconceived, having regard to the materials
considered originally by the AO, and the materials placed on record in this
petition, relating to the original claim. Therefore, the reassessment notice on
this score, is clearly an impermissible review.
7. As far as the software licensing fee issue is concerned, the court
notices that this is purely a second look at the nature of the expenditure.
Again, here the AO had addressed queries and after recording satisfaction
W.P.(C) 8163/2010 Page 5 of 6
with the answers, granted the relief. Therefore, this issue was not
legitimately open to revision.
8. In view of the foregoing discussion, the impugned notice cannot be
sustained. It and all proceedings emanating from it, are hereby quashed. The
writ petition and pending applications are allowed in these terms. No costs.
S. RAVINDRA BHAT
(JUDGE)
NAJMI WAZIRI
(JUDGE)
JANUARY 17, 2017
W.P.(C) 8163/2010 Page 6 of 6
Decided on: 17.01.2017
+ W.P.(C) 8163/2010
HCL TECHNOLOGIES LTD. ..... Petitioner
Through : Sh. Ajay Vohra, Sr. Advocate with Ms.
Kavita Jha and Sh. Vaibhav Kulkarni, Advocates.
versus
ASST. COMMISSIONER OF INCOME TAX AND ANR.
..... Respondents
Through : Ms. Lakshmi Gurung, Jr. Standing
Counsel.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
%
1. The petitioner questions a notice issued by the respondents (hereafter
“the Revenue”) under Sections 147/148 of the Income Tax Act (hereafter
“the Act”) proposing to reopen the completed assessment for 2005-2006.
The earlier assessment had been framed under Section 143 (3) of the Act.
th
The notice that the petitioner questions was issued on 4 March, 2010; the
scrutiny assessment (“original order”) was made by the Assessing Officer
th
(“AO”) on 26 December 2008 at a net taxable income of 2,16,07,60,309/-
`
allowing a deduction under Section 10A of the Act, to the extent of
` 2,20,93,33,432/-.
W.P.(C) 8163/2010 Page 1 of 6
2. The petitioner is assessed to income tax and is engaged in the business
of development and export of computer software and ITES services. It filed
its return of income for AY 2005-06 on 31.10.2005 whereby it declared an
income of Rs.18,95,23,990/- under normal provisions of the Act. The
original return claimed a deduction under Section 10A of the Act to the tune
of Rs.2,57,24,87,070/- which was supported by the Chartered Accountant’s
certificate in Form 56F. However, the petitioner filed a revised return in
March, 2007 declaring an income of Rs.1,17,48,138/-. This time, it claimed
deduction under Section 10A at Rs.2,75,57,24,990/-. The AO, by notice of
22.10.2007 raised specific question and called for information with respect
to the deductions claimed under Section 10A which included details of
income and all expenditure. The petitioners furnished the details of
information sought on 14.11.2007. The AO, after examining the revised
returns, the audited accounts and other relevant documents accompanying
the return as well as the response of the petitioner accepted the deduction
claimed under Section 10A and completed the original assessment by
making the order on 26.12.2008. He determined net taxable income of
Rs.2,16,07,60,309/-. This he did after allowing a deduction under Section
10A at Rs.2,20,93,33,432/-. On 04.03.2010, the Revenue issued the
impugned notice proposing to reassess the income. The petitioner filed its
response and elicited a copy of the “reasons to be recorded”. The reasons to
be recorded in support of the reassessment notice was thereafter furnished.
The material part of the reassessment notice says that the assessee had not
exercised the option to non-applicability of provisions of Section 10A and
did not file the declaration.
W.P.(C) 8163/2010 Page 2 of 6
3. The reassessment notice alleged that the petitioners’ claim for setting
off losses in the STP units as against the income and profits of other units,
was unwarranted and that it should have made a declaration to the effect
under Section 10A (8) rather than claiming it under Form 56F. It was
besides, contended in the notice that Section 70/71 of the Act were not
structured to allow such set off. The second ground claimed for reopening
the completed assessment was that the software licensing fee paid by the
assessee could not have been validly allowed as revenue expenditure, under
Section 37 as it fell in the capital field. The petitioner objected to both these
reasons, pointing out that the AO, in the original proceeding, by specific
nd
queries as well as through the questionnaire issued on 22 November 2007,
had sought all these details. It was also contended that there was no failure to
disclose material facts or information, and furthermore, that the software
licensing expenditure was legitimate revenue expense. The petitioners’
objections, were, however, rejected. It has, therefore, approached this court.
4. The petitioner argues that all relevant particulars were furnished
during the original proceedings and that the original order took note,
exhaustively of the material facts. It was pointed out that the P/L accounts
filed with the revenue at that point in time, contained specific notes with
respect to treatment of the separate units. Furthermore, the losses/profits as a
whole of the Section 10A units, after due computation, were claimed as a
deduction in the returns, which is in conformity with the text of the law and
decisions of various courts. Learned counsel urged that the impugned
reassessment notice is nothing but a review, which is not allowed, in terms of
Section 147/148 having regard to the judgments of the Supreme Court. As
W.P.(C) 8163/2010 Page 3 of 6
regards the question of software license is concerned, it was argued that
though the revenue claims that it falls in the capital stream, there is nothing
to show, prima facie that a license fee as opposed to consideration for
acquisition of an asset, was ever paid.
5. Counsel for the revenue argued that the petitioner assessee was bound
to treat the accounts of the Section 10A units separately, which it did not and
that consequently, the reassessment notice was legal and justified. It was
submitted that Sections 70 and 71 do not permit set off of losses or profits
from Section 10A units with normal losses or profits and therefore, the relief
claimed and granted originally, was premised on flawed understanding,
based on concealment of facts. It was urged that once the revenue unearths a
misrepresentation or misstatement of facts, it is empowered to re-open a
completed assessment. Counsel also urged that the AO’s original order
merely discussed the correctness of the petitioners’ claim in respect of 31
units, as against 13 licensed units and disallowed that plea. The emphasis
was not on the admissibility or otherwise of the set off, which was a material
fact, but which escaped scrutiny. Counsel also submitted that the software
license fee clearly resulted in a capital advantage as it resulted in an asset of
enduring nature. The AO erred in allowing that claim.
6. It is evident from the above discussion that the issue here is whether
the revenue’s impugned notice satisfies the test of “tangible material”
discerned or made available. The jurisdictional precondition to invoke the
power under law is that the AO must have reasons to believe, on the basis of
materials, (implying thereby some material not existing on record) which
point to illegality or withholding of information, or presentation of
W.P.(C) 8163/2010 Page 4 of 6
inaccurate particulars, by the assessee. In the present case, the "reasons to
believe" are a recital of events, including the previous order of assessment,
which permitted the deduction, the assessment order after scrutiny. The
notice does not anywhere indicate what was the new material which came to
light, that threw into focus the fact that the assessee's behavior in not
disclosing material particulars, attracted the provision under Section
147/148. The order of the AO contains an insight into the fact that there was
an inquiry into the Section 10A claim; in fact, the assessee has placed on
record a letter written to the AO, containing replies to the queries in respect
th
of the deduction claim, dated 14 November, 2007. The AO did not rest
content with this, and made more specific queries by a questionnaire
containing as many as 40 queries: more than 10 of which related to the
Section 10A claim. The petitioner furnished its response to these. It was after
considering these materials, that the AO passed the original order. That order
did not interestingly grant the petitioner all the relief claimed; it was based
on a scrutiny of the law and the facts. To say that the AO ignored, or that the
petitioner did not disclose that losses could not be set off against non-Section
10A units, is entirely misconceived, having regard to the materials
considered originally by the AO, and the materials placed on record in this
petition, relating to the original claim. Therefore, the reassessment notice on
this score, is clearly an impermissible review.
7. As far as the software licensing fee issue is concerned, the court
notices that this is purely a second look at the nature of the expenditure.
Again, here the AO had addressed queries and after recording satisfaction
W.P.(C) 8163/2010 Page 5 of 6
with the answers, granted the relief. Therefore, this issue was not
legitimately open to revision.
8. In view of the foregoing discussion, the impugned notice cannot be
sustained. It and all proceedings emanating from it, are hereby quashed. The
writ petition and pending applications are allowed in these terms. No costs.
S. RAVINDRA BHAT
(JUDGE)
NAJMI WAZIRI
(JUDGE)
JANUARY 17, 2017
W.P.(C) 8163/2010 Page 6 of 6