Mere Change of Opinion not Necessary Ingredient For Reassessment: ITAT quashes Reassessment on Software License Fee [Read Order]

The Chennai Bench of the Income Tax Appellate Tribunal ( ITAT ) has quashed a reassessment order and ruled that the reopening of the assessment was invalid due to it being based on a mere change of opinion. The case involved the treatment of software license fee expenses as capital expenditure, which the Assessing Officer (AO) had disallowed as revenue expenditure.

J Ray McDermott Engineering Services Pvt. Ltd. (assessee), a private limited company engaged in providing design and drawing services for the engineering industry, filed its return of income declaring a total income of Rs. 18,09,99,774.

The return was selected for scrutiny, and the original assessment was completed and the income was assessed at Rs. 18,12,11,047. The AO reopened the assessment and reason for reopening was that the assessee had claimed Rs. 6,29,67,347 towards software expenses as revenue expenditure, but only deducted Tax Deducted at Source (TDS) on Rs. 50,50,223.

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The AO treated the balance amount of Rs. 5,79,19,094 as capital expenditure and disallowed it as revenue expenditure. The AO added it to the total income after allowing 25% depreciation.

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Aggrieved by the reassessment order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) upheld the AO’s order, dismissing the assessee’s arguments including the contention that the reopening was based on a mere change of opinion.

Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT. The assessee’s counsel argued that the reopening was invalid as it was based on a change of opinion, given that all relevant details, including TDS payments and software license agreements, were furnished during the original assessment proceedings.

The counsel further contended that the software licenses were valid for only one year, as evidenced by invoices and agreements, making the expenditure revenue in nature. The counsel relied on several judicial precedents, including CIT vs. Kelvinator of India Ltd and Eimco Elecon India Ltd. vs. ACIT to support the arguments.

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The two-member bench comprising George George K (Vice President) and Jagadish (Accountant Member) observed that during the original assessment, the assessee had provided comprehensive details, including TDS payments, quarterly TDS returns, and party-wise breakup of software expenses.

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The Tribunal observed that the AO’s assumption that TDS was deducted only on Rs. 50,50,223 was incorrect, as TDS was deducted on the entire Rs. 6,29,67,347, as evidenced by the records.

The Tribunal held that the reopening was based on a mere change of opinion, as no new evidence was brought on record to justify the reassessment. The Tribunal quashed the reassessment order. The appeal of the assessee was partly allowed.

To Read the full text of the Order CLICK HERE

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