BEFORE THE HONBLE

HIGH COURT OF SOUTHERIA

INNOVATIVE PVT LTD

(Appellant)
V.
COMMISSIONER OF INCOME TAX
(Respondent)

CASE CONCERNING REOPENING OF ASSESSMENT AS UNDER

SECTION 147 OF INCOME TAX ACT, 1961.

Memorandum on the behalf of the Appellant

SUBMITTED TO:

SUBMITTED BY:

MR. CHAMARTI RAMESH KUMAR

SLESHA SUKRITI

ASST. PROF. SSLG

B.A. LL.B. (HONS.) VII SEM

TABLE OF CONTENTS

Index of Authority......................................................................................................................2
Statutes Referred:...................................................................................................................2
Cases Referred:.......................................................................................................................2
Books Cited:...........................................................................................................................2
Jurisdiction.................................................................................................................................3
Statements of the Facts...............................................................................................................4
Questions Presented...................................................................................................................6
Arguments in Advance...............................................................................................................7
Issue I: The present case involves Substantial Question of law.............................................7
Issue II: The reopening of the assessment by the Assessing Officer under Section 147 of the
Income Tax Act, 1961 was not justified.................................................................................8
The reopening of the assessment by the Assessing Officer under Section 147 of the
Income Tax Act, 1961 was not justified..............................................................................8
There can be no reopening of the assessment on the basis of a mere change of
opinion..............................................................................................................................10
The royalty is attributed as revenue expenditure and not capital expenditure..........11
Prayer For Relief......................................................................................................................12

INDEX OF AUTHORITY

STATUTES REFERRED:
1. The Income Tax Act 1961

CASES REFERRED:
1. CIT v. Kelvinator of India Ltd(2010) 320 ITR 561 (SC)

2. CIT v. Sharda Motor Industrial Limited. 319 ITR 109

3. Commissioner of Income Tax II v. Multiplex Trading & Industrial Co. LtdITA No.

356 of 2013

4. Coperion Ideal Private Limited v. Commissioner Of Income Tax ITA No. 557
of 2015
5. Deputy Commissioner of Income Tax v. Coperion Ideal private limited ITA
NO. 4375 Del2010
6. Haryana Acrylic Manufacturing Co. Ltd. v. CIT 308 ITR 38 (Del.)

7. R. Subbarao v. N. Veeraju AIR 1951 Mad 969

BOOKS CITED:

1. Dr. Vinod K. Singhania & Dr. Monica Singhania, Students Guide to Income
Tax, Taxman, 45th Edition,

JURISDICTION

The appellant respectfully submits before the Honble High Court of Southeria that the
Honble Court has the jurisdiction to entertain the present appeal, vide, Section 260A 1 of The
Income Tax Act, 1961.

1
3

STATEMENTS OF THE FACTS

The Innovative Pvt Ltd (herein after referred as assessee) established under the
Companies Act of Indiana, a country with a steady economic progress. The Assessees
registered office is located in Southeria, a bilingual state in the southern part of the
Indiana. The assessee filed its return of income for the Assessment Year 2003-04 on 31 st
October 2003 declaring income at Rs.1, 67, 91,500. The Assessees case was selected
for scrutiny under Section 143(1) of the Act on 24 th July 2004. An order was passed on
18 January 2006 under Section 143(3), assessing the income at Rs.1, 71, 46,170. One of
the items of expenditure was a sum of Rs.30, 71,489 under the head payment towards
Royalty & Cess.
On 15th Sept 2006, the Assistant Commissioner of Income Tax issued a notice u/s 154
of the Income tax Act to the Assessee seeking explanation on the ground that there was
mistake apparent from the record since the aforesaid amount should have been treated
as capital expenditure as the benefit was of enduring nature. The Assessee replied to
this notice on 5th October 2006 clarifying that;
(a) It was paying royalty at 10% on its domestic sales to M/s Innovative Co. Germany on
yearly basis;
(b) That the payment was treated as revenue expenditure as it did not relate to
acquisition of technical knowhow.
(c) The Assessee indicated that royalty is being paid for the previous 5-6 years based on
the turnover and in all those years it has been treated and allowed as revenue
expenditure.
On 2nd March 2012, more than four years after the assessment was completed, the
Assistant Commissioner of Income Tax cited the reasons for reopening of assessment
as under:
The return of income in this case was filed on 31.10.2003 at an income of Rs.1,
67, 91,500 and processed u/s 143(1) IT Act, on 24 th July 2004. Subsequently, the
4

case was selected for scrutiny and order u/s 143(3) IT Act, 1961 was passed on
18th January 2006 at assessed income of Rs.1, 71, 46,170.
According to the Income Tax Act, any expenditure not being expenditure of
capital nature laid out wholly or exclusively for the purpose of business is
allowable as deduction in computation of the income chargeable under the head
'profit and gain of business and profession'. As per collaboration agreement any
technical aid fees for setting up factory and right to sell the products is not
allowable as revenue expenditure and was to be treated as capital expenditure.
The perusal of assessment for the Assessment Year 2003-04 reveals that the
assessee has debited an amount of Rs 40,71,489/- under the head payment
towards Royalty & Cess (Royalty Rs 20,73,333/-) that was of continuing in
nature and hence was a capital expenditure and not allowable.
In view of above reasons noted by the Assistant Commissioner of Income Tax, a notice
u/s 148 was issued on 02nd March 2012 for reopening of the assessment u/s 147 for the
Assessment Year 2003-04 stating that income to the tune of Rs. 20, 73,333 has escaped
assessment because of failure on the part of the assessee to disclose full the material
facts necessary for the assessment.
The Assessee raised objections to the reopening of the assessment which was rejected
and a fresh order of assessment was passed on 23 November 2012 with an addition of
Rs. 20,73, 333 to the income of the Assessee and commencement of penalty
proceedings was directed. The assessee appealed to the Commissioner of Income Tax
(Appeals) and he allowed the appeal of the Assessee by order dated 2nd July 2013.
Against this order the Revenue moved to the ITAT and by an order dated 26th August
2013, allowed the Revenues appeal.
Aggrieved by the order of the ITAT the Assessee preferred an appeal to the High Court
of Southeria.

QUESTIONS PRESENTED

ISSUE I : WHETHER
QUESTION

OF

LAW

THE PRESENT CASE

ANY

SUBSTANTIAL

OR NOR.

ISSUE II: WHETHER

THE

ASSESSING OFFICER

UNDER

1961

INVOLVES

REOPENING

OF THE

SECTION 147

WAS JUSTIFIED OR NOT.

ASSESSMENT

OF THE

BY

THE

INCOME TAX ACT,

ARGUMENTS
ISSUE I: THE

PRESENT CASE INVOLVES

IN

ADVANCE

SUBSTANTIAL QUESTION

OF LAW.

Ss. (1) to S. 260A provides that an appeal shall lie to the High Court against an order
passed in appeal by the Appellate Tribunal, if the High Court is satisfied that the case
involves a substantial question of law.
The present case involves the substantial question of law in it as the present case
involves room for difference of opinion into it from the side of the court.
In the case of R. Subbarao v. N. Veeraju2 it was held that When a question of
law is fairly arguable, when there is room for difference of opinion on it, or where the
court thought it necessary to deal with that question at some lent and discuss
alternative view then such a question would be a substantial question of law.
The present case is very much similar to the case of CIT v. Kelvinator of India
Ltd.3in which the court has held that, even in terms of the amended Section 147 there
has to be some tangible material for an AO to have reason to believe that income has
escaped assessment. 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 AO ought not be given power to reopen the
assessment on the basis of a mere change of opinion. It was emphasised that "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 re-opening 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. The Supreme Court held as under: Hence, after 1st April, 1989,

2AIR 1951 Mad 969

3(2010) 320 ITR 561 (SC)
7

Assessing Officer has power to re-open, provided there is "tangible material" to come
to the conclusion that there is escapement of income from assessment.
In the light of the above judgments and taking into consideration the facts of the instant
case, it is humbly submitted that the present case involves a substantial question of
law.

ISSUE II: THE

UNDER

REOPENING OF THE ASSESSMENT BY THE

SECTION 147

OF THE INCOME

TAX ACT, 1961

ASSESSING OFFICER

WAS NOT JUSTIFIED.

The reopening of the assessment by the Assessing Officer

under Section 147 of the Income Tax Act, 1961 was not
justified.

The effect of the change brought about to Section 147 by way of amendment with effect
from 1st April 1989 requires to be examined. Prior to 1st April 1989, in order to reopen
an assessment the AO ought to have had reason to believe that the income of the
Assessee has escaped assessment on account of the omission or failure by the Assessee
to file a return or to disclose fully and truly all material facts necessary for assessment
for that year. After the amendment the only requirement as far as Section 147 (1) is
concerned is that the AO should have reason to believe that the income of the Assessee
has escaped assessment. However the proviso to Section 147 (1) as amended kicks in
where the reopening is sought to be done after four years after the end of the relevant
assessment year for which the original assessment was made. This brings in the
requirement of the AO satisfying himself of the existence of either jurisdictional fact.
The escapement of income should be occasioned "by reason of the failure on the part
of the assessee to make a return under section 139 or in response to a notice issued
under sub-section(1) of section 142 or section 148" or "to disclose fully and truly all
material facts necessary for his assessment, for that assessment year."
In Haryana Acrylic Manufacturing Co. Ltd. v. CIT, 4 this Court reiterated
the law in relation to reopening of an assessment under Section 147/148 of the Act after
the expiry of four years after the assessment year for which the original assessment was
made. Recently, in its decision dated 22nd September 2015 in ITA No. 356 of 2013 5this
Court, in a case where reopening of assessment was sought to be made four years after
the expiry of the original assessment, held that in order to reopen an assessment
4 308 ITR 38 (Del.),
5Commissioner of Income Tax II v. Multiplex Trading & Industrial Co. Ltd
9

which is beyond the period of four years from the end of the relevant assessment year,
the condition that there has been a failure on the part of the Assessee to truly and fully
disclose all material facts must be concluded with certain level of certainty. 16. In the
present case, there was no failure on the part of the Assessee to disclose the material
particulars with the return originally filed. On the contrary, the AO himself replied to the
audit objection pointing out that royalty was allowed to be claimed as revenue
expenditure by the Assessee for the years earlier to AY 2002-03. A copy of the
agreement under which royalty was being paid was provided to the Revenue.
In light of the legal position after the amendment to Section 147 of the Act, as explained
in CIT v. Kelvinator of India Ltd. (supra), the Court is of the view that, in a
case where the assessment is sought to be reopened in 2009, four years after it was
originally made, i.e. 2005, the mere fact that there was a judgment of the Supreme
Court of 1997 which was not noticed by the AO when he framed the original assessment
cannot per se constitute the only material on the basis of which the assessment could
have been reopened. When on the same material, four years after the assessment year
for which the original assessment is finalised, the AO seeks to reopen the assessment
on the basis of a judicial precedent delivered more than eight years earlier, it would be
a case of mere 'change of opinion', something clearly held impermissible by CIT v.
Kelvinator of India Ltd.6(supra), The threshold requirement of that the AO
should, on the basis of some tangible material, conclude that there was escapement of
income on account of the Assessee failing to disclose material particulars, is not fulfilled
in the present case. Consequently, the reopening of the assessment was, in the facts of
the present case, not justified.

6(2010) 320 ITR 561 (SC)

10

There can be no reopening of the assessment on the basis of

a mere change of opinion.

In the present case the On 15th Sept 2006, i.e. after the completion of the time period
(4 years) of reopening the assessment, the Assistant Commissioner of Income Tax
issued a notice u/s 154 of the Income tax Act to the Assessee seeking explanation on
the ground that there was mistake apparent from the record since the aforesaid amount
should have been treated as capital expenditure as the benefit was of enduring nature.
It can be fairly seen that there is a change of opinion in the present case regarding the
attribution

of

the

income.

Earlier, the income tax department allowed the assesse allowed the amount to be
attributed as revenue expenditure but after 6 years, there was a change in the opinion
which results the question of reopening of the assessment in the mind of the
assessment officer.
The Supreme Court in CIT v. Kelvinator of India Ltd.7suprahas held that,
even in terms of the amended Section 147 there has to be some tangible material for an
AO to have reason to believe that income has escaped assessment. 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 AO ought not
be given power to reopen the assessment on the basis of a mere change of opinion. It
was emphasised that "re-assessment has to be based on fulfilment of certain precondition and if the concept of 'change of opinion' is removed, as contended on behalf
of the Department, then, in the garb of re-opening 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. The Supreme Court held as under: Hence,
after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible
material" to come to the conclusion that there is escapement of income from
assessment.
7(2010) 320 ITR 561 (SC)
11

The royalty is attributed as revenue expenditure and not

capital expenditure.

As per the order passed on 18 January 2006 under Section 143(3), assessing the income
at Rs.1, 71, 46,170, one of the items of expenditure was a sum of Rs.30, 71,489 under
the head payment towards Royalty & Cess.
The payment was treated as revenue expenditure as it did not relate to acquisition of
technical knowhow and he was paying royalty at 10% on its domestic sales to M/s
Innovative Co. Germany on yearly basis. It cannot be considered as a capital
expenditure

as

according

to

the

decision of Delhi High Court in the case of CIT Vs. Sharda Motor Industrial
Limited.8, wherein it was held that royalty is revenue expenditure and cannot be
considered as capital expenditure.
In the case of Commissioner of Income Tax II v. Multiplex Trading & Industrial Co. Ltd 9
and Coperion Ideal Private Limited vs Commissioner Of Income
Tax10also, in which the facts of the case where very much similar from the present
case and One of the items of expenditure was a sum of Rs.20, 71, 489 under the head
Royalty & Cess it was considered as revenue expenditure and not as a Capital Expenditure.
Moreover, Earlier, the income tax department allowed the assesse allowed the amount

to be attributed as revenue expenditure but after 6 years, there was a change in the
opinion which results the question of reopening of the assessment in the mind of the
assessment officer.
Therefore, in the present case, the royalty in question cannot be considered as a capital
expenditure but as revenue expenditure.
8319 ITR 109
9ITA No. 356 of 2013
10 ITA No. 557 of 2015

12

13

PRAYER FOR RELIEF

For the foregoing reasons, the Appellant, respectfully requests the Court to adjudge and
declare that:
1. The royalty is attributed as revenue expenditure and not capital
expenditure

2. Reopening of the assessment by the Assessing Officer under Section 147

of the Income Tax Act, 1961 was not justified .
3. There can be no reopening of the assessment on the basis of a mere
change of opinion.

ANY OTHER ORDER IT DEEMS FIT IN THE INTERESTS OF JUSTICE, EQUITY AND GOOD
CONSCIENCE.

ALL

OF

WHICH RESPECTFULLY SUBMITTED

BY

THE APPELLANT.

(COUNSEL

14

FOR

THE APPELLANT)