J RAY MCDERMOTT ENGINEERING SERVICES PRIVATE LIMITED ,CHENNAI V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(2), CHENNAI

ITA 2016/CHNY/2024

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The case involves J Ray McDermott Engineering Services Pvt. Ltd., which appealed against the order of the CIT(A)/NFAC concerning the assessment year 2012-13. The primary contention was regarding the reassessment of software expenses amounting to Rs.5,79,19,094, which the AO treated as capital expenditure, thus reopening the assessment under section 148 of the Income Tax Act. The Tribunal examined whether the reassessment was justified and found that it was based on a mere change of opinion without new evidence, leading to the quashing of the reassessment order.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 312852 (ITAT-CHENNAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Other Referred Cases: Eimco Elecon (India) Ltd. vs. ACIT, CIT vs. Shriram Chits Tamilnadu (P.) Ltd., CIT vs. Shriram City Union Finance Ltd., CIT vs. Danfos Industries (P.) Ltd., CIT vs. Karur Vysya Bank Ltd., CGI Information Systems and Management Consultants (P.) Ltd. vs. ITP, Indian Aluminium Co. Ltd. vs. CIT, ACIT vs. BSIFS P. Ltd., ACIT vs. AIM Fincon (P.) Ltd., PCIT vs. Fibres and Fabrics International (P.) Ltd., DCIT vs. MSEB Holding Co. Ltd., CIT vs. Kelvinator of India Ltd., ITO vs. Lakhmani Mewal Das, Changepond Technologies (P.) Ltd. vs. DCIT, Unitech Exhibition (P.) Ltd. vs. DCIT, Tenzing Match Works vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANITHA
• Assessee Lawyers: VISHAL KALRA
• Keywords: Difference of opinion; Change of opinion; Revenue expenditure; Reassessment proceedings; Depreciation; Reopening of assessment; Capital expenditure; TDS; Reason to believe
• Section: 147; 148; 143(3); 32; 234B

Judgement Text

"आयकर अपीलȣय अͬधकरण,‘सी’ Ûयायपीठ, चेÛनई IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI Įी जॉज[ जॉज[ क े, उपाÚय¢ एवं Įी जगदȣश, लेखा सदèय क े सम¢ BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENTAND SHRI JAGADISH, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.: 2016/CHNY/2024 िनधाᭅरण वषᭅ/Assessment Year: 2012-13 J Ray McDermott Engineering Services Pvt. Ltd., 3rd and 4th Floor, Block/Tower 1DT, DLF Down Town, Chennai – 600 028. PAN: AABCJ 6787H Vs. The Deputy Commissioner of Income Tax, Circle 2(2), Chennai. (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) अपीलाथᱮ कᳱ ओर से/Appellant by : Shri Vishal Kalra, Advocate ᮧ᭜यथᱮ कᳱ ओर से/Respondent by : Ms. Anitha, Addl. CIT सुनवाई कᳱ तारीख/Date of Hearing : 29.04.2025 घोषणा कᳱ तारीख/Date of Pronouncement : 30.04.2025 आदेश /O R D E R PER GEORGE GEORGE K, VICE PRESIDENT: This appeal at the instance of the assessee is directed against the CIT(A)/NFAC’s order dated 10.06.2024, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2012-13. - 2 - ITA No.2016/CHNY/2024 2. Brief facts of the case are as follows: The assessee is a private limited company engaged in the business of providing design and drawing services for engineering industry. For the assessment year 2012-13, the return of income was filed on 29.11.2012 declaring total income of Rs.18,09,99,774/-. The return of income was selected for scrutiny and assessment was completed u/s.143(3) of the Act vide order dated 16.03.2016 assessing total income at Rs.18,12,11,047/-. Thereafter the assessment was reopened and notice u/s.148 of the Act was issued on 28.02.2019. The reason for issuance of notice for reopening the assessment was that assessee had claimed as revenue expenditure a sum of Rs.6,29,67,347/- towards software expenses. The AO noted that the expenditure claimed as revenue expenditure pertains to software and license fee paid and the assessee company had deducted TDS only in respect of payment of Rs.50,50,223/-. Hence, the AO was of view that balance amount of Rs.5,79,19,094/- is to be treated as capital expenditure. In response to the notice issued u/s.148 of the Act, the assessee filed reply stating that software license is valid for only one year and the amount claimed as expenditure under the software expenses is not capital in nature. However the explanation offered by the assessee company was not accepted by the AO and software expenses to the tune of Rs.5,79,19,094/- was treated as capital - 3 - ITA No.2016/CHNY/2024 expenditure. The AO added the same to the total income of the assessee after allowing 25% depreciation. 3. Aggrieved by the order of the AO passed u/s.147 r.w.s. 143(3) r.w.s. 92CA(3) of the Act, the assessee filed an appeal before the First Appellate Authority. Before the First Appellate Authority, the assessee raised grounds on merits as well as on legal issue. One of the legal ground taken by the assessee before the First Appellate Authority was that reopening of assessment is bad in law since in the original assessment, the assessee had furnished all the relevant details and reassessment completed by the present AO is only on mere change of opinion. The CIT(A) however rejected the arguments of the assessee and dismissed the grounds of assessee both on merits as well on legal issues. 4. Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal, raising the following grounds:- 1. That on the facts and circumstances of the case and in law, the Assessing Officer (\"AO\") has erred in completing the assessment of the Appellant under section 143(3) read with section 147 of the Act vide order dated December 18, 2019 at an income of INR 23,43,39,095 under the normal provisions of the Act as against the returned income of INR 18,09,99,770. - 4 - ITA No.2016/CHNY/2024 2. That on the facts and circumstances of the case and in law, the order passed by the AO under section 143(3) read with section 147 of the Act is illegal, bad in law, without jurisdiction and thus, liable to be quashed. Further, the CIT(A) has erred in upholding the said order. 3. That on the facts and circumstances of the case and in law, the re- assessment order passed by the AO is invalid and thus, liable to be quashed as the same was initiated merely on the basis of change of opinion as all the material information was already available with the AO while passing the original assessment order. Further, the CIT(A) has erred in upholding the said order. 4. That on the facts and circumstances of the case and in law, the proceedings initiated by the AO under section 147/ 148 of the Act for the subject assessment year without issuing the mandatory notice under section 143(2) of the Act are bad in law, without jurisdiction and thus, liable to be quashed. Further, the CIT(A) has erred in upholding the said order. 5. That on the facts and circumstances of the case and in law, the CIT(A) has erred in not appreciating that the order dated December 18, 2019 passed by the AO under section 143(3) read with section 147 of the Act is bad in law and liable to be quashed as the same was passed manually without the issuance of the Document Identification Number (\"DIN\"), as mandated by the CBDT Circular No. 19/2019. 6. That on the facts and circumstances of the case and in law, the AO/ CIT(A) have erred in disallowing INR 5,79,19,094, being expenditure incurred by the Appellant in respect of software/ license fee, alleging the same to be capital in nature. 7. That on the facts and circumstances of the case and in law, the AO has erred in concluding, on assumptions, surmises and ignoring the submissions filed by the Appellant, that since tax was withheld only in respect of software/ license fee expenditure amounting to INR 50,50,223, - 5 - ITA No.2016/CHNY/2024 the balance amount represented capital expenditure. Further, the CIT(A) has erred in upholding the said order. 8. That on the facts and circumstances of the case and in law and without prejudice to the above-mentioned grounds of appeal, the AO/ CIT(A) have erred in allowing depreciation in respect of software/ license fee at the rate of 25% instead of the applicable rate of 60% per the provisions of section 32 of the Act read with Income Tax Rules 1962 (\"Rules\"). 9. That on the facts and circumstances of the case and in law and without prejudice to the above-mentioned grounds of appeal, the A0 has erred in incorrectly computing the assessed income of the Appellant at INR 23,43,39,095 instead of INR 22,44,39,095. Further, the CIT(A) has erred in upholding the said order. 10. That on the facts and circumstances of the case and in law, the AO has erred in levying interest under section 234A of the Act of INR 12,86,768 not appreciating the fact that the return of income was filed by the Appellant on or before the due date prescribed under section 139(1) of the Act. Further, the CIT(A) has erred in upholding the said order. 11. That on the facts, and circumstances of the case and in law, the AO has erred in levying interest under section 234B of the Act amounting to INR 1,50,55,679. 4.1 The assessee had filed four sets of paper-book. In two sets of paper-book, the assessee had enclosed the case laws relied upon. In the other two sets of paper-book, the assessee had enclosed the submissions made before the First Appellate Authority, before the AO, sample copies of invoices, TDS made by the assessee to non- resident, the license agreement entered by the assessee and the vendors etc. On merits, the Ld.AR submitted that license fee - 6 - ITA No.2016/CHNY/2024 expenses pertain to only one year and the same is evident from the invoices / purchase orders and agreements entered between vendors and the assessee company. It was submitted that since these documents clearly show that the licenses are valid only for one year and is renewed annually if required, it is evident that the expenditure incurred is on the revenue front. Further, it was submitted that software license fee amounting to Rs.5,79,19,094/- should not be considered as capital expenditure given that such expenditure is incurred to increase and support the organization efficiency and it is incurred on yearly basis. In support of the contention raised on merits, the Ld.AR relied on the following case laws:- i. Eimco Elecon (India) Ltd., vs. ACIT, [2013] 33 taxmann.com 476 (Ahmedabad – Trib) ii. CIT vs. Shriram Chits Tamilnadu (P.) Ltd., [2024] 303 Taxman 24 (Madras) iii. CIT vs. Shriram City Union Finance Ltd. [2024] 460 ITR 232 (Madras) iv. CIT vs. Danfos Industries (P.) Ltd., [2022] 284 Taxman 475 (Madras) v. CIT vs. Karur Vysya Bank Ltd., [2015] 229 Taxman 396 (Madras) vi. CGI Information Systems and Management Consultants (P.) Ltd., vs. ITP, [2023] 455 ITR 270 (Karnataka) vii. Indian Aluminium Co. Ltd., vs. CIT, [2016] 384 ITR 386 (Calcutta) 4.2 As regards to legal contention, the Ld.AR submitted that reopening of assessment is bad in law since it is on a mere change of opinion. It was submitted during the course of original scrutiny assessment proceedings u/s.143(3) of the Act, the assessee - 7 - ITA No.2016/CHNY/2024 company had duly furnished sufficient information and documents regarding deductibility and payment of TDS on various payments made by the assessee and the same having been examined by the AO, it cannot be said that the AO had any tangible evidence on record to reopen the assessment. In support of the above contention, the Ld.AR relied on the following case laws:- i. ACIT vs. BSIFS P. Ltd., [2025] 171 taxmann.com 416 (SC) [upheld BSIFS (P) Ltd vs. ACIT [2024] 161 taxmann.com 443 (Bombay)] ii. ACIT vs. AIM Fincon (P.) Ltd., [2024] 468 ITR 110 (SC) [upheld AIM Fincon (P.) Ltd., vs. ACIT [2024] 166 taxmann.com 680 (Gujarat)] iii. PCIT vs. Fibres and Fabrics International (P.) Ltd., [2022] 288 taxman 20 (SC) iv. DCIT vs. MSEB Holding Co. Ltd., [2020] 113 taxmann.com 163 (SC) v. CIT vs. Kelvinator of India Ltd., [2010] 320 ITR 561 (SC) vi. ITO vs. Lakhmani Mewal Das, [1976] 103 ITR 437 (SC) vii. Changepond Technologies (P.) Ltd., vs. DCIT, [2024] 168 taxmann.com 516 viii. Unitech Exhibition (P.) Ltd., vs. DCIT, [2024] 168 taxmann.com 516 (Madras) ix. Tenzing Match Works vs. DCIT, [2019] 110 taxmann.com 543 (Madras) 4.3 The Ld.AR also submitted that the reassessment is bad in law since no statutory notice u/s.143(2) of the Act has been issued. In support of this above contention of the Ld.AR, he relied on the following case laws:- i. ITO vs. Lakhmani Mewal Das, [1976] 103 ITR 4337 (SC) ii. ACIT vs. Hotel Blue Moon, [2010] 321 ITR 362 (SC) iii. Amec Foster Wheeler Iberia SLU vs. DCIT, [2023] 451 ITR 117 (Madras) iv. Sapthagiri Finance & Investments vs. ITO, [2012] 210 Taxman 78 (Madras) v. PCIT vs. Oberoi Hotels (P.) Ltd., [2018] 409 ITR 132 (Calcutta) vi. CIT vs. Alstom T&D India Ltd., [2014] 45 taxmann.com 424 (Madras) vii. Netherlands Operating Company B.V. vs. ACIT, [2024] ITA No.1198/Chny/2023 (Chennai-Trib) viii. PCIT vs. Silver Line, [2016] 383 ITR 455 (Delhi) - 8 - ITA No.2016/CHNY/2024 4.4 Alternatively, it was contended that depreciation is to be allowed at 60% on the software license acquired by the assessee which is covered under Entry 5 of Part A of New Appendix I. In support of the alternative contention, the Ld.AR relied on the judgment of the Hon’ble Jurisdictional High Court in the case of CIT vs. Computer Age Management Services (P) Ltd., reported in [2019] 267 Taxman 146. 5. The Ld.DR on the other hand supported the orders of the AO and the CIT(A). 6. We have heard rival submissions and perused the material on record. The assessee apart from raising grounds with regard to merits, had also raised grounds on legal issues namely no notice has been issued u/s.143(2) of the Act, hence the reassessment is bad in law. The other legal contentions raised is that the assessee during the course of original assessment proceedings u/s.143(3) of the Act had furnished all the requisite details before the AO. Thus, the basis of reopening of the assessment u/s.147 of the Act was a mere change of opinion. We shall first adjudicate the legal contention that reopening is bad in law, since it is a mere change of opinion by the AO. In this context, it is relevant to mention that AO passed the - 9 - ITA No.2016/CHNY/2024 original assessment order u/s.143(3) of the Act on 16.03.2016 determining the total income of the assessee company at Rs.18,12,11,047/-. Subsequently, on perusal of the financial statement for the relevant assessment year namely 2012-13, the AO observed that assessee company had claimed Rs.6,29,67,347/- towards software expenses. Furthermore, the AO also noted in the reasons for reopening the assessment that assessee company had done withholding of taxes only in respect of payments made to M/s. Siemens Enterprises Pvt. Ltd., amounting to Rs.50,50,223/-. On the basis of this assumption, the AO reopened the assessment proceedings u/s.147 of the Act for the balance payment amounting to Rs.5,79,19,094/- by assuming the same to be of capital expenditure and cannot be allowed as revenue expenditure. The reasons recorded for issuance of notice u/s.148 of the Act (notice dated 28.02.2019) is reproduced below:- “The assessee has claimed Rs.6,29,67,347/- towards software expenses under the head other expenses in schedule 19 of the P&L Account. This expenditure pertains to software & license fee paid to various parties. The assessee has deducted the TDS only in respect of the payment of Rs.50,50,223/- to M/s Siemens Enterprises Pvt. Ltd., In this connection, the above treatment goes to show that except for payments made to M/s. Siemens Enterprises Pvt. Ltd., all other payments of Rs.5,79,19,094/- is towards license fee only which is capital expenditure and not revenue expenditure. The payments towards license fee treated as intangible assets and the assessee is eligible for depreciation @ 25% only.” - 10 - ITA No.2016/CHNY/2024 6.1 The AO is empowered to initiate penalty proceedings u/s.147 of the Act if there is reason to believe that income chargeable to tax in respect of relevant assessment year had escaped assessment. The expression ‘reason to believe’ in section 147 of the Act (i) should postulate belief (ii) the existence of reason for that belief (iii) it should not be subjective satisfaction and (iv) belief of officer must not be arbitrary or irrational. In the instant case, during the course of original assessment proceedings u/s.143(3) of the Act, the assessee company had duly furnished the detailed submissions on 21.01.2016 and 28.01.2016 along with the relevant annexures. The following information and documents were furnished along with the submission:- “1. Details of Taxes Deducted at Source (“TDS”) by the Assessee on the payments made to non-residents along with copy of challans. 2. Copy of quarterly withholding tax returns in Form 24Q and Form 26Q for the subject AY 3. Party wise breakup of the following expenses with the applicability of TDS- i. Sub-contractors ii. Audit fees iii. Legal and professional charges iv. Rent and amenities v. Interest vi. Salary vii. Software and license fees 4. Copy of ledger of the following expenses – i. Prepaid expenses ii. Repairs and Maintenance - 11 - ITA No.2016/CHNY/2024 iii. Rates and tax iv. Office expenses” 6.2 From the above, it is clear that the assessee company had duly furnished sufficient information and documents regarding deductibility and payment of TDS on various payments made by the assessee during the relevant assessment year including the payments made for software license fees. It had also furnished copy of quarterly TDS return, the details of TDS deducted on the payments made to the non-resident, the party-wise details of breakup expenses including the software expenses, etc. The details of TDS deducted are placed on record. On perusal of the same, it is clear that TDS was duly deducted and paid during the subject year on the total amount of software and license expenses amounting to Rs.6,29,67,347/-. Therefore, the reasons furnished by the AO for reopening the assessment for the relevant assessment year is incorrect. The Hon’ble Bombay High Court in the case of BIC Cello (India) (P.) Ltd., vs. ACIT reported in [2024] 160 taxmann.com 474 held that when reasons on which reliance is placed for reopening the assessment itself is incorrect, the initiation of reassessment is bad in law and liable to be quashed. Similar view has been held by the Hon’ble Rajasthan High Court in the case of Rajhans Processors vs. UOI reported in [2023] 149 taxmann.com 29 and by the Hon’ble - 12 - ITA No.2016/CHNY/2024 Delhi High Court in the case of PCIT vs. RMG Polyvinyl (I) Ltd., reported in [2017] 396 ITR 5 (Delhi). 6.3 Further, since information and documents were duly furnished at the time of original assessment, the allegation of the AO in issuance of notice u/s.148 of the Act stating that balance software license fee amounting to Rs.5,79,19,094/- should be considered as capital expenditure, can be stated to be only change of opinion. Therefore, the essential pre-requisite for the AO to assume jurisdiction u/s.147 / 148 of the Act which is the formation of reasonable belief that assessee’s income chargeable to tax had escaped assessment has not been satisfied in the instant case. In this context, we rely on the following judicial pronouncements: - i. ACIT vs. BSIFS P. Ltd., [2025] 171 taxmann.com 416 (SC) [upheld BSIFS (P) Ltd vs. ACIT [2024] 161 taxmann.com 443 (Bombay)] ii. ACIT vs. AIM Fincon (P.) Ltd., [2024] 468 ITR 110 (SC) [upheld AIM Fincon (P.) Ltd., vs. ACIT [2024] 166 taxmann.com 680 (Gujarat)] iii. PCIT vs. Fibres and Fabrics International (P.) Ltd., [2022] 288 taxman 20 (SC) iv. DCIT vs. MSEB Holding Co. Ltd., [2020] 113 taxmann.com 163 (SC) v. CIT vs. Kelvinator of India Ltd., [2010] 320 ITR 561 (SC) vi. ITO vs. Lakhmani Mewal Das, [1976] 103 ITR 437 (SC) vii. Changepond Technologies (P.) Ltd., vs. DCIT, [2024] 168 taxmann.com 516 viii. Unitech Exhibition (P.) Ltd., vs. DCIT, [2024] 168 taxmann.com 516 (Madras) ix. Tenzing Match Works vs. DCIT, [2019] 110 taxmann.com 543 (Madras) 6.4 Moreover, for the relevant assessment year 2012-13, notice u/s.148 of the Act has been issued beyond four years and by virtue - 13 - ITA No.2016/CHNY/2024 of first proviso to section 147 of the Act, no reassessment notice can be issued when there was no failure on the part of the assessee to disclose fully and truly all material facts during the course of original proceedings. In the instant case, assessee had disclosed in the original proceedings, the relevant details and the AO has merely issued notice u/s.148 of the Act on presumption that for the amount for which payment has been made where there is no TDS made (wrong assumption), the said expenditure is to be termed as capital expenditure instead of revenue expenditure. Moreover, on perusal of the invoices / purchase orders and agreement entered between the vendors and the assessee company, we find that software license fee expenses incurred are valid for one year and may be renewed annually if required. In the case of Eimco Elecon (India) Ltd., vs. ACIT reported in [2013] 33 taxmann.com 476, the Ahmedabad Bench of the Tribunal had held that where license fee is paid only for increasing the organizational efficiency, the same cannot be treated as forming part of the profit-making apparatus, and such expenditure made on the license fee should be treated as revenue expenditure. For the aforesaid reasoning and relying on the judicial pronouncement cited supra, we are of the view that the AO had issued notice u/s.148 of the Act on a mere change of opinion and has not satisfied the necessary ingredients for initiating - 14 - ITA No.2016/CHNY/2024 reassessment proceedings u/s.148 of the Act. Hence, we accept the contention of the Ld.AR on the legal issue that the reopening of assessment is invalid and quash the reassessment order. Since, we quash the reassessment on legal ground, the other grounds raised by the assessee is left open and is not adjudicated. It is ordered accordingly. 7. In the result, the appeal filed by the assessee is partly-allowed. Order pronounced in the open court on 30th April, 2025 at Chennai. Sd/- Sd/- (जगदȣश) (JAGADISH) लेखा सदèय/ACCOUNTANT MEMBER (जॉज[ जॉज[ क े) (GEORGE GEORGE K) उपाÚय¢ /VICE PRESIDENT चेÛनई/Chennai, Ǒदनांक/Dated, the 30th April, 2025 RSR आदेश कȧ ĤǓतͧलͪप अĒेͪषत/Copy to: 1. अपीलाथȸ/Appellant 2. Ĥ×यथȸ/Respondent 3. आयकर आयुÈत /CIT, Chennai 4. ͪवभागीय ĤǓतǓनͬध/DR 5. गाड[ फाईल/GF. "