Principal Officer Vs ACIT (Supreme Court of India)
When the Reopening Ground Falls, Other Additions Cannot Keep It Alive- Supreme Court
The controversy
Can the Revenue continue reassessment proceedings on other grounds when the very ground on which the assessment was reopened becomes untenable? The Supreme Court answered this question in favour of the assessee. In the circumstances before it, once the alleged withholding-tax default underlying the reopening failed, the reassessment could not survive by relying on other possible additions.
The dispute concerned assessment years 2006-07, 2007-08 and 2008-09. The Department alleged that LG Electronics Korea, the parent company of the Indian assessee, and other associated enterprises had a Permanent Establishment in India. Consequently, according to the Revenue, the Indian company was required to deduct tax at source on remittances made to those entities.
The alleged failure to deduct tax was used to propose disallowance of the expenditure under section 40(a)(i). Notices under section 148 were issued on 28 March 2013, 21 March 2014 and 31 March 2015 for the respective assessment years.
The High Court permitted reopening
Before the High Court, the assessee challenged the reassessment notices on limitation and other grounds. It contended that there was no failure to disclose fully and truly all material facts and that the proceedings represented a mere change of opinion. The assessee also relied on the provisions of the India–Korea Double Taxation Avoidance Agreement.
The High Court noted that a survey under section 133A had led to three parallel consequences: proceedings to tax the foreign entities, proceedings against the Indian company under section 201 for failure to deduct tax, and reassessment proceedings to disallow expenditure under section 40(a)(i).
It rejected the limitation objection on the footing that the existence of the Korean company’s Permanent Establishment in India had not been disclosed. The treaty-related questions were left for examination during reassessment. Accordingly, the High Court declined to interfere with the notices.
An unusual appellate predicament
Before the Supreme Court, the assessee’s counsel explained that reassessments had already been completed. However, the communication purporting to convey the appellate order under section 250 enclosed two blank papers, frustrating the assessee’s further appeal. Counsel also submitted that the incumbent CIT(A) who issued that communication had subsequently been suspended.
These were submissions recorded by the Court. They explained the assessee’s predicament, but the substantive relief ultimately rested on the collapse of the withholding-tax foundation of the reassessment.
The section 201 proceedings changed the position
The Revenue’s counsel brought to the Court’s attention that the ITAT had already decided the parallel section 201 proceedings in favour of the assessee. He suggested that the Tribunal’s order could be produced before the Assessing Officer or the appellate authority to obtain deletion of the related disallowance.
The Supreme Court examined that order. It noted that the assessment proceedings against LG Electronics Korea had been quashed by the ITAT for non-implementation of the Dispute Resolution Panel’s directions. Those appellate orders, covering assessment years 2005-06 to 2010-11, had not been challenged because of low tax effect.
In the section 201 proceedings, the Tribunal held that there was no tax liability on the payee, LG Electronics Korea, and consequently no obligation on the Indian assessee to withhold tax under section 195. The assessee therefore could not be treated as an assessee in default under section 201.
On that footing, the Supreme Court concluded that the corresponding section 40(a)(i) disallowance could not stand. It considered a remand to the Assessing Officer unnecessary.
Other grounds could not rescue the reassessment
The Revenue argued that the completed reassessments might contain other grounds or additions, particularly since the reassessment orders had not been produced before the Court.
The Supreme Court rejected that argument. It found that the reopening concerned the alleged section 201 default and the consequential section 40(a)(i) disallowance. When the ground on which reassessment was initiated became untenable, other grounds arising during reassessment could not be used to sustain the proceedings.
The Court held the reassessment proceedings for all three years to be unenforceable. It directed the assessee to produce the Supreme Court’s decision and the ITAT’s section 201 order before the Assessing Officer, who was required to close the proceedings. The appeals were allowed.
Author’s comments
A reopening cannot be kept alive merely because the Department may have discovered something else after entering the reassessment proceedings. This decision provides strong support where the sole recorded basis for reopening has failed and the Revenue seeks to preserve the proceedings through unrelated additions.
The withholding-tax conclusion must nevertheless be read carefully. The Court proceeded on the Tribunal’s finding that there was no tax liability on the payee and therefore no withholding obligation. It should not be presented as a blanket proposition that every favourable section 201 order automatically eliminates a section 40(a)(i) disallowance, irrespective of why relief was granted.
Equally, the judgment concerns notices issued under the earlier reassessment regime. Its application to proceedings under the substituted provisions requires separate examination. For the years and facts before the Court, however, the message is clear: once the foundation of the reopening disappeared, the reassessment could not survive on other possible grounds.
FULL TEXT OF THE SUPREME COURT ORDER
The appellant/assessee under the Income Tax Act, 19611 was concerned with the notice issued under Sections 147/148 of the Act; which the High Court refused to interfere with and hence the appeal.
2. Essentially the reassessment was proposed for the Assessment Years 2006-07, 2007-08 and 2008-09 alleging that parent company of the assessee, M/s L.G. Electronics Korea and other associated enterprises were running a Permanent Establishment (PE) in India, thereby obligating the assessee to deduct TDS on the remittances made to the parent company and the associated enterprises. The notices under Section 148 for the relevant years are dated 28.03.2013, 21.03.2014 and 31.03.2015 produced in the respective appeals as Annexures P11, P11 and P1. It was alleged that income of the assessee had escaped assessment, since the failure to deduct TDS brings in a consequence of disallowance of such expenses under Section 40 (a) (i) of the IT Act.
3. The assessee before the High Court urged the ground of limitation pointing out that there is nothing to show that income has escaped assessment due to the failure on the part of the assessee to disclose complete and full facts or that the assessee was guilty of concealment of facts. The reassessment thus is reduced to a mere change of opinion, which cannot be permitted. The Double Taxation Avoidance Agreement (DTAA) between India and Korea was also put forth along with the other grounds.
4. The Division Bench of the High Court found that proceedings were taken against the Korean Company and it is related entities to tax the chargeable income in their hands and there were also proceedings initiated against the appellant company under Section 201 of the IT Act for recovery of amount of tax, not deducted at source. The third consequence, which arose from the survey conducted under Section 133A of the IT Act, was the instant proceedings to disallow the related expenses under Section 40(a)(i) for failure to deduct taxes. The Division Bench left the question of DTAA to be considered in the reassessment proceedings and negatived the contention of limitation; since, there was no disclosure with respect to the Permanent Establishment of the Korean Company operating in India. The notice under Section 148 for initiating reassessment proceedings under Section 147 does not call for any interference, held the impugned order.
5. Sri Deepak Chopra, Learned Senior Counsel for the assessee, pointed out that the reassessment proceedings were carried out and, in an appeal, there was an order under Section 250 of IT Act communicated, without anything written on the same and enclosing in two blank papers. The assessee’s further appeal was frustrated, and it is informed that the incumbent CIT (Appeals) NOIDA, who issued the blank order, was later suspended. As of now, unless the notice issued under Section 148 is interfered with, the assessee would be left remediless.
6. Sri Raghavendra P. Shankar, learned Additional Solicitor General, on the other hand, pointed out that the parallel proceedings initiated under Section 201 stand allowed in favour of the assessee by the Income Tax Appellate Tribunal (ITAT). What remains is for the appellant to produce the said order either before the officer who conducted the reassessment or in an appeal instituted, which could be reckoned to delete the disallowance carried out on this ground. The learned ASG would contend that since reassessment order is not produced, he is unable to assist as to whether there were grounds on which reassessment was carried out.
7. The order of the ITAT from the proceedings under Section 201 is produced as Annexure A1 in I.A. No.118536 of 2025 in C.A. No.18067 of 2017. From a reading of the order, we find that the proceedings initiated under Section 201 were taken in appeal and on the directions of the Dispute Resolution Panel (DRP), the First Appellate Authority modified the order, determining profits at 20% markup on 50% salary cost of the expatriate employees, attributed to the Permanent Establishment of L.G. Korea, in India. It was also noticed that the assessment proceedings initiated against L.G. Korea was quashed by the ITAT for non-implementation of the directions of the DRP. The said appellate orders for the assessment years 2005-06 to 2010-11 were not challenged, since it had low tax effect. The ITAT, in the proceedings under Section 201, held that there is no tax liability on the payee i.e. L.G. Korea and hence there is no obligation on the assessee to withhold tax under Section 195 of the Act. The appellant/assessee was found not liable to be treated as an ‘assessee-in-default’ under Section 201 of the Act. If the assessee cannot be treated as an ‘assessee-in-default’ under Section 201, necessarily there can be any disallowance made under Section 40(a)(i) of the IT Act and hence even if the reassessment proceedings have been carried out, we are of the opinion that it requires no remand to the Assessing Officer.
8. We also take note of the submission of ASG that there could be other grounds on which reassessment was actually carried out, which we cannot subscribe to. The notice under Section 147 was only with respect to the default under Section 201 and the disallowance of the expenses claimed under Section 40(a)(i) of the Act. If the ground on which reassessment is found to be initiated is untenable, then there is no question of any other ground coming forth in the reassessment proceedings being utilized for the purpose of determining escapement of income. We, hence, hold that the reassessment proceedings initiated are unenforceable for the assessment years 2006-07 to 2008-09. The appellant shall produce our decision and the decision of the ITAT produced as Annexure A1 under Section 201 proceedings before the Assessing Officer who shall close the reassessment proceedings as unenforceable.
9. The appeals are allowed.
10. Pending application(s), if any, shall stand rejected.
Note:
1 For brevity, “the IT Act”
