M/S Microsoft Corporation (I) Pvt. Ltd v. Deputy Commissioner Of Income Taxand Anr

THE HIGH COURT OF DELHI AT NEW DELHI %Judgment delivered on: 23.05.2013 +W.P.(C) 284/2013 M/S MICROSOFT CORPORATION (I) PVT. LTD ..... Petitioner versus DEPUTY COMMISSIONER OF INCOME TAXAND ANR ..... Respondents Advocates who appeared in this case:For the Appellant: Mr Nageswar Rao, Mr Sandeep S. Karhailand Ms Sayaree Basu MallikFor the Respondent: Mr N.P. Sahni, with Mr Ruchesh Sinha CORAM:-HON’BLE MR JUSTICE BADAR DURREZ AHMEDHON’BLE MR JUSTICE VIBHU BAKHRU JUDGMENT BADAR DURREZ AHMED, J (ORAL) 1.The petitioner has challenged the reopening of assessment in respect ofthe assessment year 2005-06, which was initiated by virtue of a notice underSection 148 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) on26.03.2012. The point of challenge raised by the petitioner is that the reopeningof assessment was sought to be done after a period of four years, therefore, theconditions stipulated in the proviso to Section 147 of the Act would have to becomplied with. One of the conditions was that a reopening could not be doneuntil and unless there was failure on the part of the assessee to make a full andtrue disclosure of all material facts which were necessary for the assessment. Itwas contended by the learned counsel for the petitioner that in the present case, this pre-condition was not satisfied inasmuch as (a) there is no mention orallegation that there was no full and true disclosure on the part of the assessee inthe purported reasons behind the reopening of the assessment in respect ofassessment year 2005-06; and (b) in fact there was a full and true disclosure onthe part of the assessee and even no inference could be drawn from the purportedreasons that there was no such full and true disclosure. It was also contended bythe learned counsel for the petitioner that this was also a case of a mere change ofopinion and, therefore, in view of the settled principles of law, the attempt atreopening the assessment which had been completed under Section 143(3) of theAct on 24.12.2008, was not supported by law. 2.The learned counsel for the petitioner drew our attention to the purportedreasons which had been recorded prior to the issuance of the notice under Section148 of the Act. The said recorded reasons read as under:- “Reasons recorded u/s 147 of the I.T. Act, 1961 1.Section 37 of the Income Tax Act, 1961 provides that anyexpenditure, not being in the nature of capital expenditure, laid outwholly or exclusively for the purpose of business, is allowable asdeduction in computation of the income chargeable under the head`profits and gains of business or profession'. i.The assessment of M/s Microsoft Corporation (India) Pvt.Ltd. for the assessee year 2005-06 was completed u/s 143(3) of theIncome Tax Act in December 2008 determining Rs. 57,65,41,440/-as taxable income. It is found that the assessee had claimed and wasallowed a deduction of Rs. 1,49,11,728/- on campaign expenditurefor the launch of new product. Since this expenditure gave anenduring benefit to the assessee, it was required to be capitalizedand added back to the income of the assessee. The omission resultedin allowance of inadmissible expenditure of Rs. 1,49,11,728/-involving short levy of income tax of Rs. 79,12,032/-includinginterest u/s 234B. i.The assessment of M/s Microsoft Corporation (India) Pvt.Ltd. for the assessee year 2005-06 was completed u/s 143(3) of theIncome Tax Act in December 2008 determining Rs. 57,65,41,440/-as taxable income. It is found that the assessee had claimed and wasallowed a deduction of Rs. 1,49,11,728/- on campaign expenditurefor the launch of new product. Since this expenditure gave anenduring benefit to the assessee, it was required to be capitalizedand added back to the income of the assessee. The omission resultedin allowance of inadmissible expenditure of Rs. 1,49,11,728/-involving short levy of income tax of Rs. 79,12,032/-includinginterest u/s 234B. 2.Under section 43B of the Income Tax Act, any sum payableto an employee as bonus or commission for services rendered aredeductible on actual payment basis. Section 145 of the Income TaxAct, 1961, provides that income under the head "profits and gain ofbusiness or profession" is computed in accordance with the method ofaccounting regularly employed by the assessee. Where the assesseefollows mercantile system of accounting, the annual profits areworked out on due or accrual basis i.e. after providing for all expensesfor which a legal liability has arisen and taking credit for all receiptsthat have become due regardless of their actual receipt or payment.Only such expenses are allowable as deduction from a previous year'sincome as are relevant to that year. i.It is found that the assessee pre-existing liability of Rs.3,69,83,105/- in respect of Bonus payable [Annexure VIII of the TaxAudit (3CD) report] against which the assessee had paid Rs.6,34,63,086/- during the year. Thus, the assessee had made paymentof Rs. 2,64,79,981/- relating to prior period, which was in excess ofthe pre-existing liability allowable under section 43B. Therefore, thepayment of business in excess of pre-existing liability was required tobe added back to the taxable income of the assessee. The omission intakingintoaccounttheinadmissibleexpenditureresultedinallowance of prior period expenditure of Rs. 2,64,79,981/- in respectof pre-existing liability involving short levy of income tax of Rs.1,40,50,046/- including interest u/s 234B. 3.Section 40A(7) of the Income Tax Act provides that nodeduction is allowed in computing business income in respect of amere provision made by the assessee in his books of account for thepayment of gratuity to his employees. The provision made for thepurpose of payment of sums by way of contribution towards theapproved gratuity fund that has become payable during the previousyear or for the purpose of making any payment on account of gratuitythat has become payable during the previous years is, however eligiblefor deduction. i.It is that the assessee was allowed a deduction of Rs.76,35,763/- towards provision for payment of gratuity. However thispayment has been depicted as inadmissible expenditure in column17(i) of the Tax Audit (3CD) report submitted by the assessee.Therefore, this expenditure is required to be added back to the taxable income of the assessee. The omission in taking into account theinadmissible expenditure resulted in allowance of excess deduction ofRs. 76,35,763/- involving short levy of income tax of Rs. 40,51,469/-including interest u/s 234B. 4.Section 143(3) of the Income Tax Act, 1961 provides thatin a scrutiny assessment, the Assessing Officer is required to makea correct assessment of total income or loss of the assessee anddetermine the correct sum payable by him or refundable to him onthe basis of such assessment. income of the assessee. The omission in taking into account theinadmissible expenditure resulted in allowance of excess deduction ofRs. 76,35,763/- involving short levy of income tax of Rs. 40,51,469/-including interest u/s 234B. 4.Section 143(3) of the Income Tax Act, 1961 provides thatin a scrutiny assessment, the Assessing Officer is required to makea correct assessment of total income or loss of the assessee anddetermine the correct sum payable by him or refundable to him onthe basis of such assessment. i.It is found that the Assessing Officer had disallowed the claimof the assessee for depreciation on ITG Networking equipments@60% and depreciation @25% was allowed to the assessee.However, the allowable depreciation was incorrectly computed in thepara 4.3 of the assessment order. Due to this omission, the excessdepreciation Rs. 42,38,742/- was added back to the income of theassessee instead of actual figure of Rs. 56,58,417/-. The mistakeresulted in under assessment of income by Rs. 14,19,945/- involvingshort levy of tax of Rs. 7,53,410/- including interest u/s 234B. 5.Section 37 of the Income Tax Act, 1961 provides that anyexpenditure, not being in the nature of capital expenditure, laid outwholly or exclusively for the purpose of business, is allowable asdeduction in computation of the income chargeable under the head`profits and gains of business or profession'. i.It is found that the assessee claimed and was allowed 100%revenue expenditure on the following computer / software relatedexpenditure - (i) deduction of Rs. 3,37,81,547/- on 'translation ofcourseware / software in local language', and (ii) deduction of Rs.88,49,138/- on design content and maintenance of website. Since thisexpenditure gave an enduring benefit to the assessee, it was required tobe capitalized and the assessee was eligible for depreciation @60% onthese capital expenditure. The omission resulted in underassessment ofincome by Rs. 1,70,52,274/- involving short levy of tax of Rs.90,47,787/- including interest u/s 234B. 6.Section 37 of the Income Tax Act, 1961 provides that anyexpenditure, not being in the nature of capital expenditure, laid outwholly or exclusively for the purpose of business, is allowable as deduction in computation of the income chargeable under the head`profits and gains of business or profession'. i.It is found that the assessee claimed and was alloweddeduction of Rs. 88,50,8411- for expenditure on 'consultancy fordevelopment of marketing strategy' and Rs. 4,54,41,136/- (Rs.3,61,60,538/- + Rs. 92,80,598/-) on 'market research'. Since theexpenditure on marketing intangibles gave an enduring benefit to theassessee, it was required to be capitalized and added back to the totalincome of the assessee. The omission resulted in underassessment ofincome by Rs. 5,42,91,977/- involving levy of tax of Rs. 3336.69 lacsincluding interest u/s 234B. I, therefore, have reasons to believe that the income of Rs.12,17,91,668/- has escaped assessment within the meaning of section147 of the I.T. Act, 1961, due to omission on the part of the assesseeto include this sum into its income for the relevant previous year.” 3.The petitioner filed its objections to the said reasons on 10.05.2012,whereby, the petitioner took the specific plea that since there was no allegationthat the petitioner had not made a full and true disclosure of all the material factsnecessary for its assessment, the invocation of the provisions of Section 147 ofthe Act was itself not valid. The petitioner also raised the objection that the issuessought to be raised in the recorded reasons had been considered by the AssessingOfficer at the time of the original assessment completed under Section 143(3) ofthe Act on 24.12.2008 and the present attempt at reopening the assessment isnothing but one in furtherance of a mere change of opinion, which isimpermissible in law.It was also contended by the learned counsel for thepetitioner that from the recorded reasons, it could not even inferred that there wasno full and true disclosure on the part of the petitioner/assessee. 4.The learned counsel for the petitioner then drew our attention to the orderdated 12.11.2012 passed by the Assessing Officer disposing of the said objections. He contended that the said order dated 12.11.2012, which is also thesubject matter of challenge in the present petition, was not a reasoned order at all.Referring to the said order, he submitted that paragraphs 1, 2 & 3, thereof merelyreproduced the reasons recorded and fact that a notice had been served and thatobjections had been received from the petitioner and the nature of the objections.In paragraph 3, the provisions of Section 147 of the Act have also been quoted.The objections have only been dealt with, by the Assessing Officer, in paragraph4 of the said order dated 12.11.2012, which reads as under:- “4. The objections raised by the assessee company and the caselaws cited by it have been considered viz a viz the Explanation 1to Section 147 which has been reproduced above. In view of theunambiguous meaning of Explanation 1, and the facts andcircumstances of the case under which the reasons were recorded,the objections of the assessee are not acceptable and are thereforerejected.”laws cited by it have been considered viz a viz the Explanation 1to Section 147 which has been reproduced above. In view of theunambiguous meaning of Explanation 1, and the facts andcircumstances of the case under which the reasons were recorded,the objections of the assessee are not acceptable and are thereforerejected.” 5.According to the learned counsel for the petitioner, this manner of dealingwith the objections is highly unsatisfactory and is not in accord with the decisionof the Supreme Court in the case ofGKN Driveshafts (India) Ltd. v. Income TaxOfficer and Ors.: (2003) 259 ITR 19 (SC). In that decision the Supreme Courtgave the following directions:- "5. We see no justifiable reason to interfere with the order underchallenge. However, we clarify that when a notice under Section 148of the Income Tax Act is issued, the proper course of action for thenoticee is to file return and if he so desires, to seek reasons forissuing notices. The Assessing Officer is bound to furnish reasonswithin a reasonable time. On receipt of reasons, the noticee isentitled to file objections to issuance of notice and the AssessingOfficer is bound to dispose of the same by passing a speaking order.In the instant case, as the reasons have been disclosed in theseproceedings, the Assessing Officer has to dispose of the objections,challenge. However, we clarify that when a notice under Section 148of the Income Tax Act is issued, the proper course of action for thenoticee is to file return and if he so desires, to seek reasons forissuing notices. The Assessing Officer is bound to furnish reasonswithin a reasonable time. On receipt of reasons, the noticee isentitled to file objections to issuance of notice and the AssessingOfficer is bound to dispose of the same by passing a speaking order.In the instant case, as the reasons have been disclosed in theseproceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with theassessment in respect of the abovesaid five assessment years." 6.The learned counsel for the petitioner submitted that the Assessing Officerwas bound to dispose of the objections by passing a speaking order. According tohim, the order dated 12.11.2012 could not be considered as a speaking order atall, as none of the objections raised by the petitioner have been specifically dealtwith by the Assessing Officer. The learned counsel for the petitioner placedreliance on the decision of this court in Rose Serviced Apartments Pvt Ltd v. Dy. if filed, by passing a speaking order, before proceeding with theassessment in respect of the abovesaid five assessment years." 6.The learned counsel for the petitioner submitted that the Assessing Officerwas bound to dispose of the objections by passing a speaking order. According tohim, the order dated 12.11.2012 could not be considered as a speaking order atall, as none of the objections raised by the petitioner have been specifically dealtwith by the Assessing Officer. The learned counsel for the petitioner placedreliance on the decision of this court in Rose Serviced Apartments Pvt Ltd v. Dy. Commissioner of Income Tax: (2012) 348 ITR 452 (Del.) as also on anotherdecision of this court in the case ofHaryana Acrylic Manufacturing Companyv. The Commissioner of Income Tax IV and Anr.: (2009) 208 ITR 38 (Del),which was also relied upon inRose Serviced Apartments(supra). The learnedcounsel for the petitioner also placed reliance on the decision of the BombayHigh Court inHindustan Lever Ltd. v. R.B. Wadkar, Asst. Commissioner ofIncome Tax and Ors.: (2004) 268 ITR 339 (Bom). 7.It was also pointed out by the learned counsel for the petitioner that in thecourse of the original assessment proceedings, a questionnaire had been furnishedto the petitioner for its reply. The said questionnaire required the petitioner togive details on various aspects of the assessment, which, according to the learnedcounsel for the petitioner, also included those aspects which were sought to becovered under the recorded reasons. The said questionnaire reads as under:- "In connection with the pending proceedings as referredabove,youarerequiredtofurnishthefollowinginformation/evidence or documents:- 1.Give details of Travelling & Conveyance exceeding onelakhlakh 2.Give details of Legal & Professional exceeding one lakh 3.Give details of Purchased Services exceeding one lakh 4.Details of claim of doubtful debt of Rs.3624334 claimed incomputation of incomecomputation of income 5.Claim of leave encashment expenses of computation. 6.Details of Admn Services, its nature and expenses details. 7.Exhibition expenses exceeding one lakh 8.Advertisement expenses exceeding one lakh give separatedetails of expenses in foreign currency.details of expenses in foreign currency. 9.During the year in the fixed asset schedule there are salesof assets which includes sale of vehicle and furniture pleasegive details of persons to whom sales have been made andalso inform if these purchasers are related to company.of assets which includes sale of vehicle and furniture pleasegive details of persons to whom sales have been made andalso inform if these purchasers are related to company. 10. Any impact on claim of depreciation in new of notes to A/citems.items. 11. During the year company has made various expenses inforeign currency as per details in notes to A/c give details& its purpose.foreign currency as per details in notes to A/c give details& its purpose. 12. Details of assets written off as per item No.14 of Tax AuditReport and item No.17.Report and item No.17. 13. Considering disclaimer in Co1.17(f) of Tax Audit Report,explain how your accounts can be examined for complianceof provisions of section 40(9)explain how your accounts can be examined for complianceof provisions of section 40(9) 14. During the year vehicles were purchased give details ofevidence of put to use of vehicles purchased in the monthof March 2005.evidence of put to use of vehicles purchased in the monthof March 2005. 15. Explain nature of foreign exchange fluctuation claimed indepreciation chart.depreciation chart. 16. Details of contract with M.S. Decorators (P) Ltd. & it's A/c . 17. Explain purchase of furniture repair in new space occupiedby assessee and its availability.by assessee and its availability. 18. Refer to Annexure V of Tax Audit Report where theseamounts have been debited in P&L account.amounts have been debited in P&L account. 14. During the year vehicles were purchased give details ofevidence of put to use of vehicles purchased in the monthof March 2005.evidence of put to use of vehicles purchased in the monthof March 2005. 15. Explain nature of foreign exchange fluctuation claimed indepreciation chart.depreciation chart. 16. Details of contract with M.S. Decorators (P) Ltd. & it's A/c . 17. Explain purchase of furniture repair in new space occupiedby assessee and its availability.by assessee and its availability. 18. Refer to Annexure V of Tax Audit Report where theseamounts have been debited in P&L account.amounts have been debited in P&L account. 19. Please explain why amounts in annexure VIII,IX,X & XIare not disallowed as per section 43Bare not disallowed as per section 43B Why prior period expenses as per Tax Audit Report be notdisallowed. This letter may, please be treated as a part of noticeu/s 142(1) of the I.T. Act, 1961. It may please be notedthat failure to comply with this notice will invite penalprovisions u/s 271(1)(b) of the I.T. Act, 1961." 8.The learned counsel for the petitioner submitted that in item nos. 12, 13,18 & 19 of the questionnaire, there is specific reference to the Tax Audit Report(Form 3 CD). He submitted that these issues had been considered and thepetitioner had furnished replies in respect thereof at the time of the originalassessment proceedings. The very same issues are sought to be raised by theAssessing Officer in the recorded reasons. Therefore, according to the learnedcounsel for the petitioner, this reflected nothing but a mere change in opinionwhich is impermissible in law. The learned counsel for the petitioner alsoreferred to item no. 8 of the questionnaire, wherein, the Assessing Officer hadspecifically requested for details of advertisement expenses exceeding ` 1 lac andseparate details of expenses in foreign currency. He submitted that these verydetails formed the subject matter of the recorded reasons and, therefore, this wasalso a case of mere change in opinion. 9.For all these reasons, the learned counsel for the petitioner submitted thatinvocation of the provisions of Section 147 of the Act for reopening theassessment in respect of the assessment year 2005-06 was bad in law.Consequently, it was prayed that the impugned notice dated 26.03.2012 underSection 148 of the Act and all proceedings pursuant thereto including the orderdated 12.11.2012 be quashed or set aside. 10.Mr Sahni appearing on behalf of the revenue contended that the reopeningof assessment in the facts of the present case was clearly within the four cornersof law. He submitted that this was a case where the petitioner had claimedexpenditure under wrong heads and, therefore, this amounted to the assessee nothaving made a full and true disclosure of material facts which were necessary forits assessment. The learned counsel made detailed submissions with regard toeach of the point nos. 1, 3, 4 & 5 of the recorded reasons to which we shall alludeto below. He placed reliance on the decision of this court in the case ofDalmia Pvt Ltd v. Commissioner of Income Tax and Anr: (2012) 348 ITR 469 (Del.).He also placed reliance on the decision of the Supreme Court in the case ofM/sPhool Chand Bajrang Lal and Anr v. Income Tax Officer and Anr: (1993) 203ITR 456 (SC) and Raymond Woollen Mills Ltd. v. Income Tax Officer and Ors: (1999) 236 ITR 34 (SC). 11.Mr Sahni placed particular emphasis on the provisions of Section 147 ofthe Act and, in particular, on Explanation 1 thereunder. The said provisions, tothe extent relevant, are set out hereinbelow:- Pvt Ltd v. Commissioner of Income Tax and Anr: (2012) 348 ITR 469 (Del.).He also placed reliance on the decision of the Supreme Court in the case ofM/sPhool Chand Bajrang Lal and Anr v. Income Tax Officer and Anr: (1993) 203ITR 456 (SC) and Raymond Woollen Mills Ltd. v. Income Tax Officer and Ors: (1999) 236 ITR 34 (SC). 11.Mr Sahni placed particular emphasis on the provisions of Section 147 ofthe Act and, in particular, on Explanation 1 thereunder. The said provisions, tothe extent relevant, are set out hereinbelow:- “147. – Income Escaping Assessment – If the Assessing Officerhas reason to believe that any income chargeable to tax has escapedassessment for any assessment year, he may, subject to theprovisions of sections 148 to 153, assess or reassess such incomeand also any other income chargeable to tax which has escapedassessment and which comes to his notice subsequently in thecourse of the proceedings under this section, or recompute the lossor the depreciation allowance or any other allowance, as the casemay be, for the assessment year concerned (hereafter in this sectionand in sections 148 to 153 referred to as the relevant assessmentyear): Provided that where an assessment under sub-section (3) of section143 or this section has been made for the relevant assessment year,no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless anyincome chargeable to tax has escaped assessment for suchassessment year by reason of the failure on the part of the assesseeto make a return under section 139 or in response to a notice issuedunder sub-section (1) of section 142 or section 148 or to disclosefully and truly all material facts necessary for his assessment, forthat assessment year: Explanation 1.—Production before the Assessing Officer ofaccount books or other evidence from which material evidencecould with due diligence have been discovered by the AssessingOfficer will not necessarily amount to disclosure within themeaning of the foregoing proviso. 12.In the context of Explanation 1 set out above, Mr Sahni submitted that themere fact that the Tax Audit Report was available with the Assessing Officer didnot mean that there was disclosure within the meaning of the proviso to Section147 of the Act. He submitted that even if the Assessing Officer could have, withdue diligence, discovered material from the Tax Audit Report, it does notnecessarily mean that the petitioner had made a full and true disclosure ofmaterial facts. Therefore, just because the items mentioned in the recordedreasons have been mentioned in the Tax Audit Report would not necessarilyamount to disclosure in the context of the proviso to Section 147 of the Act. Healso submitted that in the first round when the original assessment took place,there was no examination of the issues sought to be raised in the recordedreasons. Therefore, the present case was not a case of mere change of opinioninasmuch as, according to him, in the first round, no opinion had been formed bythe Assessing Officer. 13.If we examine the recorded reasons, we find that item nos. 1, 5 & 6 of therecorded reasons essentially deal with the issue as to whether the expenses were 13.If we examine the recorded reasons, we find that item nos. 1, 5 & 6 of therecorded reasons essentially deal with the issue as to whether the expenses were in the nature of revenue expenses or capital expenses. It is apparent that insofaras item no. 1 is concerned, it deals with campaign expenditure to the extent of `1,49,11,728/-. As per the recorded reasons, this expenditure was required to becapitalised and, therefore, ought to have been added back to the income of theassessee. Consequently, according to the recorded reasons, the omission resultedin allowance of inadmissible expenditure involving short levy of income-tax of `79,12,032/- including interest under Section 234B of the Act. Insofar as this itemis concerned, the learned counsel for the petitioner, had already drawn ourattention to the questionnaire which we have reproduced above. Item no. 8 ofthat questionnaire specifically dealt with advertisement expenses exceeding ` 1lac. Referring to the details furnished by the petitioner, the learned counsel forthe petitioner had drawn our attention to the reply to the questionnaire which wassubmitted by the petitioner on 13.10.2008. The reply inter alia reads as under:- “4. Details of Advertisement expenses exceeding Rs 1 lakhs During the subject year, MCIPL had incurred Advertisementexpenses amounting to Rs 902,649,399. Detail of theAdvertisement expenses exceeding Rs 1 lakhs has beenenclosed as Annexure 4 and detail of advertisement expensesincurred in foreign currency exceeding Rs 1 lakhs has beenenclosed as Annexure 4A.” 14.Annexure 4 referred to above, contained details of advertising expensesexceeding ` 1 lac incurred during the assessment year 2005-06. One of the itemsmentioned there was campaign expenditure for launch of new products to theextent of ` 1,49,11,728/- which is the very same item mentioned in item no. 1 ofthe recorded reasons.At this juncture, we may also refer to the expenses forconsultancy for the development of marketing strategy which were also given asdetails of advertising expenses. The said item was for an amount of ` 88,50,841/-which is the same as referred to in item no. 6 of the recorded reasons. Under the same details, market research expenses to the extent of ` 3,61,60,538/- have alsobeen shown which is also the subject matter of item no. 6 of the recorded reasons.Furthermore, the said details also mention expenses towards design cost ofwebsite/prototype(`8,49,138/-)anddesigncontent&maintenanceofwebsite/prototype (` 80,00,000/-) which, together total ` 88,49,138/-. This formspart of the recorded reason no. 5. Finally, the expenditure of translation ofcourseware/software in local language to the extent of ` 3,37,81,547/- has alsobeen shown in the said Annexure-4 and this forms part of item no. 5 of therecorded reasons. 15.In other words, the details pertaining to the recorded reason nos. 1, 5 & 6had been sought by the Assessing Officer and had been provided by thepetitioner/assessee in the course of the original assessment proceedings.Theonly issue pertaining to these items (i.e., item nos. 1, 5 & 6 of the recordedreasons) is that they should not have been treated as revenue expenditure but,ought to have been treated as capital expenditure and, therefore, the saidexpenditure ought to have been added back to the income of the assessee.Whenever the issue of whether an expenditure is of a revenue or a capital naturearises, it almost always lends itself to debate. Therefore, the details having beensought in the original assessment proceeding and having been supplied by theassessee and the Assessing Officer having thereafter allowed the expenses asrevenue expenses as claimed by the assessee, to take the view in the recordedreasons that the expenses were capital in nature, would clearly amount to achange of opinion. 16.Insofar as the disclosure part is concerned, it is evident that the concept offull and true disclosure applies not only to the stage of filing of the return but tothe entire process of assessment under Section 143(3). This is also clear from the 16.Insofar as the disclosure part is concerned, it is evident that the concept offull and true disclosure applies not only to the stage of filing of the return but tothe entire process of assessment under Section 143(3). This is also clear from the decision of this court in the case of Honda Siel Power Products v. Dy. CIT:(2012) 340 ITR 53 (Del.) wherein this court held that “the term ‘failure’ on thepart of the assessee” is not restricted to the income-tax return and the columns ofthe income-tax return or the tax audit report. The court held that the expression“failure to fully and truly disclose material facts” also relates to the stage of theassessment proceedings and that there can be omission and failure on the part ofthe assessee to disclose material facts fully and truly during the course of theassessment proceedings. Therefore, when the assessee furnishes details duringthe assessment proceedings, it cannot, at the subsequent stage of reopening besaid that there was failure on the part of the assessee to disclose fully and truly allmaterial facts necessary for his assessment. If there is a full and true disclosurein the course of the assessment proceedings, that will have to be regarded as adisclosure for the purpose of the proviso to Section 147 of the said Act.Therefore, insofar as item nos. 1, 5 & 6 of the recorded reasons are concerned,we find that there was no failure to disclose full and true material facts necessaryfor the assessment. Moreover, it is also a case of a mere change in opinion. 17.Insofar as recorded reason no. 3 is concerned, it pertains to the provisionmade for payment of gratuity to the extent of ` 76,35,763/-. It is noted in therecorded reasons that this payment had been depicted as inadmissible expenditurein column 17(i) of the Tax Audit Report (3CD) submitted by the petitioner.Therefore, according to the belief of the Assessing Officer, the expenditure wasrequired to be added to the taxable income of the assessee and that the omissionin taking into account the inadmissible expenditure had resulted in allowance ofexcess deduction of ` 76,35,763/- involving a short levy of income tax of `40,51,469/- including interest under Section 234B of the Act. In this context, itmay be relevant to note that the recorded reasons themselves point out that thesaid item had been shown in column no. 17(i) of the Tax Audit Report which was furnished by the assessee in the course of the assessment proceedings. We havealso examined a copy of the said report and we find that item 17(i) of the saidreport falls on the same page as item no. 17(f) of the report. It falls on the nextpage to item no. 17(a) of the report. Item no. 17(a) deals with expenditure of acapital nature and, particularly, with the assets written off by the petitioner. ItemNo. 17(f) deals with amounts inadmissible under Section 40(a).The point ofmentioning these items is that the Assessing Officer had examined the Tax AuditReport in detail and had asked for details and information which according tohim were necessary for framing the assessment.This is not a case whereExplanation 1 to section 147 of the Act can be pressed into service. It is not thatthe Assessing Officer, if he was diligent enough, could have discovered materialevidence. Here, the Assessing Officer was diligent. He closely examined theTax Audit Report and raised questions and sought information on aspects wherehe needed greater clarity. 18.Now, coming back to the Tax Audit Report and the question ofadmissibility of the provision made for gratuity, we find that Assessing Officer,in the questionnaire issued by him, specifically asked the petitioner to explain asto why the amounts mentioned in, inter alia, annexure (ix) should not bedisallowed as per section 43B of the Act. This question would only have beenraised if the Assessing Officer was satisfied that the provision for payment ofgratuity was admissible on account of the fact that the gratuity fund was anapproved fund. Upon such satisfaction, the next logical question for theAssessing Officer would be as to whether the payment had been made within thestipulated time as prescribed under Section 43B of the Act and, that is exactlywhat the Assessing Officer did. Therefore, we feel that insofar as the question ofprovision of payment for gratuity is concerned, the issue had been specificallyexamined by the Assessing Officer and, therefore, the recorded reasons attempted to bring about a mere change in opinion. Apart from this, we also hold that therewas full and true disclosure on the part of the petitioner inasmuch as this item hadbeen specifically mentioned in the Tax Audit Report as item no. 17(i) and inannexure (ix) as also in the details furnished by the petitioner subsequent to thequestionnaire. 19.This leaves us with the consideration of recorded reason no. 4 whichpertains to depreciation on ITG networking equipment.It is contended in therecorded reasons that though the assessee had claimed depreciation on the saidequipments @ 60%, the Assessing Officer had allowed depreciation at only @25%. However, while doing so, the Assessing Officer made a computational errorand due to that excess depreciation to the extent of ` 14,19,945/- involving ashort levy of tax of ` 7,53,410/- including interest under Section 234B of the Acthad resulted. In other words, insofar as this item is concerned, it was merely acomputational error on the part of the Assessing Officer. We feel that suchcomputational error could have easily been corrected by the Assessing Officerunder Section 154 of the Act.In fact, the Assessing Officer had initiatedproceedings under Section 154. However, it appears that the Assessing Officerhad ultimately dropped the same. Mr Sahni confirms the fact that Section 154proceedings were not pursued further.In these circumstances, we feel thatAssessing Officer would not be entitled to reopen the assessment. It is he whohad made a computational error. The assessee, on his part, had fully and trulydisclosed all the material facts with regard to the claim of depreciation at the timeof the assessment. It is another matter that the Assessing Officer did not allowthe claim of 60% depreciation but only allowed depreciation @ 25% and, whiledoing so, the Assessing Officer made an error in computing that amount. 20.We may also point out that we do not agree with the contention of MrSahni that the recorded reasons expressly indicate that there was failure on thepart of the assessee to make a full and true disclosure of the material factsnecessary for its assessment. Mr Sahni had placed reliance on the last sentence ofthe recorded reasons which reads as under:- “I therefore have reasons to believe that the income of Rs.12,17,91,668/- have escaped assessment within the meaning ofSection 147 of the IT Act, 1961, due to omission on the part ofthe assessee to include this sum into its income for the relevantprevious years”. 20.We may also point out that we do not agree with the contention of MrSahni that the recorded reasons expressly indicate that there was failure on thepart of the assessee to make a full and true disclosure of the material factsnecessary for its assessment. Mr Sahni had placed reliance on the last sentence ofthe recorded reasons which reads as under:- “I therefore have reasons to believe that the income of Rs.12,17,91,668/- have escaped assessment within the meaning ofSection 147 of the IT Act, 1961, due to omission on the part ofthe assessee to include this sum into its income for the relevantprevious years”. What is to be seen is that the expression used by the Assessing Officer is “due toomission on the part of the assessee to include this sum into its income”. Theallegation is not that there was no disclosure on the part of the assessee but thatthe assessee had not included the said amount as part of its income.Thisexpression needs to be read in the context of the earlier part of the recordedreasons where the reasons essentially recorded that expenses should have beenshown as capital expenditure and not as revenue expenditure and that theprovision for payment of gratuity was inadmissible etc. It is not a statement thatthe petitioner had failed to disclose fully and truly any particular piece ofinformation which was necessary for the purpose of assessment. Furthermore,we also cannot infer any such belief on the part of the Assessing Officer thatthere was a failure to make a full and true disclosure of material facts on the partof the assessee. 21.For the sake of completeness, we shall now consider the decisionscited at the bar. We shall first take up those decisions which were reliedupon by the learned counsel for the petitioner.In Hindustan Lever Ltd(supra), a Division Bench of the Bombay High Court, while considering the argument that, even if the words “failure to disclose fully and truly allmaterial facts relevant for assessment for the assessment year” were absentin the reasons recorded, still such reasons could be inferred from the text ofthe reasons recorded, observed as under:- “ThereasonsrecordedbytheAssessingOfficernowhere state that there was failure on the part of the assesseeto disclose fully and truly all material facts necessary for theassessment of that assessment year. It is needless to mentionthat the reasons are required to be read as they were recordedby the Assessing Officer. No substitution or deletion ispermissible. No additions can be made to those reasons. Noinference can be allowed to be drawn based on reasons notrecorded. It is for the Assessing Officer to disclose and openhis mind through reasons recorded by him. He has to speakthrough his reasons. It is for the Assessing Officer to reach theconclusion as to whether there was failure on the part of theassessee to disclose fully and truly all material facts necessaryfor his assessment for the concerned assessment year. It is forthe Assessing Officer to form his opinion. It is for him to puthis opinion on record in black and white. The reasons recordedshould be clear and unambiguous and should not suffer fromany vagueness. The reasons recorded must disclose his mind.The reasons are the manifestation of the mind of the AssessingOfficer. The reasons recorded should be self-explanatory andshould not keep the assessee guessing for the reasons. Reasonsprovide the link between conclusion and evidence. The reasonsrecorded must be based on evidence. The Assessing Officer, inthe event of challenge to the reasons, must be able to justifythe same based on material available on record. He mustdisclose in the reasons as to which fact or material was notdisclosed by the assessee fully and truly necessary forassessment of that assessment year, so as to establish the vitallink between the reasons and evidence. That vital link is thesafeguardagainstarbitraryreopeningoftheconcludedassessment. The reasons recorded by the Assessing Officercannot be supplemented by filing an affidavit or making an oral submission, otherwise, the reasons which were lacking inthe material particulars would get supplemented, by the timethe matter reaches the court, on the strength of the affidavit ororal submissions advanced. Having recorded our finding that the impugned noticeitself is beyond the period of four years from the end of theassessment year 1996-97 and does not comply with therequirements of the proviso to Section 147 of the Act, theAssessing Officer had no jurisdiction to reopen the assessmentproceedings which were concluded on the basis of assessmentunder Section 143(3) of the Act. On this short count alone theimpugned notice is liable to be quashed and set aside.” 22.A Division Bench of this court, in the case of Haryana Acrylic(supra), observed as under:- “Viewed in this light, the proviso to Section 147 of the saidAct, carves out an exception from the main provisions ofSection 147. If a case were to fall within the proviso, whetheror not it was covered under the main provisions of Section 147of the said Act would not be material. Once the exceptioncarved out by the proviso came into play, the case would falloutside the ambit of Section 147. Examining the proviso [set out above], we find that no actioncan be taken under Section 147 after the expiry of four yearsfrom the end of the relevant assessment year if the followingconditions are satisfied: (a)an assessment under Sub-section (3) of Section 143 orthis section has been made for the relevant assessment year;and (b)unless any income chargeable to tax has escapedassessment for such assessment year by reason of the failureon the part of the assessee: (i)to make a return under Section 139 or in response to anotice issued under Sub-section (1) of Section 142 or Section148; or (ii)to disclose fully and truly all material facts necessary forhis assessment for that assessment year. Condition (a) is admittedly satisfied inasmuch as the originalassessment was completed under Section 143(3) of the saidAct. Condition (b) deals with a special kind of escapement ofincome chargeable to tax. The escapement must arise out ofthe failure on the part of the assessee to make a return underSection 139 or in response to a notice issued under Sub-section(1) of Section 142 or Section 148. This is clearly not the casehere because the petitioner did file the return. Since there wasno failure to make the return, the escapement of income cannotbe attributed to such failure. This leaves us with theescapement of income chargeable to tax which arises out ofthe failure on the part of the assessee to disclose fully and trulyall material facts necessary for his assessment for thatassessment year. If it is also found that the petitioner haddisclosed fully and truly all material facts necessary for itsassessment, then no action under Section 147 could have beentaken after the four year period indicated above. So, the keyquestion is whether or not the petitioner had made a full andtrue disclosure of all material facts. In the reasons supplied to the petitioner, there is no whisper,what to speak of any allegation, that the petitioner had failed todisclose fully and truly all material facts necessary forassessment and that because of this failure there has been anescapement of income chargeable to tax. Merely having areason to believe that income had escaped assessment, is notsufficient to reopen assessments beyond the four year periodindicated above. The escapement of income from assessmentmust also be occasioned by the failure on the part of theassessee to disclose material facts, fully and truly. This is anecessary condition for overcoming the bar set up by theproviso to Section 147. If this condition is not satisfied, the bar would operate and no action under Section 147 could betaken.” In the reasons supplied to the petitioner, there is no whisper,what to speak of any allegation, that the petitioner had failed todisclose fully and truly all material facts necessary forassessment and that because of this failure there has been anescapement of income chargeable to tax. Merely having areason to believe that income had escaped assessment, is notsufficient to reopen assessments beyond the four year periodindicated above. The escapement of income from assessmentmust also be occasioned by the failure on the part of theassessee to disclose material facts, fully and truly. This is anecessary condition for overcoming the bar set up by theproviso to Section 147. If this condition is not satisfied, the bar would operate and no action under Section 147 could betaken.” From the above, it is evident that merely having a reason to believe thatincome had escaped assessment is not sufficient for reopening theassessment beyond the four year period referred to above. It is essentialthat the escapement of income from assessment must be occasioned by thefailure on the part of the assessee to, inter alia, disclose material facts, fullyand truly. If this condition is not satisfied, there would be a bar to takingany action under Section 147 of the said Act. 23.The above decision in Haryana Acrylic (supra) was relied upon byanother Division Bench of this court in Rose Serviced Apartments (supra).Referring to Explanation I to Section 147 of the said Act, this court, in thelatter decision, observed as under:- “17.Reading of the explanation 1 of the provisomakes it clear that mere productio