HIGH COURT OF KARNATAKA
Sysarris Software (P.) Ltd.
Deputy Commissioner of Income Tax, Circle-12(3) Bengaluru
AJIT J GUNJAL, J.
W.P. NO. 40221 of 2011 (T-IT)
MARCH 8, 2012
1. The petitioner is questioning the initiation of proceedings under Section 148 of the Income-tax Act, 1961 pursuant to Annexure-A.
2. The matter arises in the following manner:
The petitioner claims to be a private limited company incorporated under the provisions of the Companies Act, 1956. It is affiliated to Forma Apps, a company incorporated in United States of America engaged in the business of development and export of computer software to its affiliate enterprises. The petitioner filed its return of income for the assessment year 2006-07 declaring loss of Rs. 60,89.533/-. The said return was filed on 26-10-2006. The respondent No. 1 passed an assessment order under Section 143(3) of the Act on 29.8.2008 and issued a demand notice under Section 156 of the Act raising ‘nil’ demand far the assessment year 2006-07. According to the petitioners respondent No. 1 issued a notice under Section 148 of the Act on 6.1.2010 for the assessment year 2006-07. Indeed pursuant to the said notice Section 148 of the Act the petitioner sent a communication to respondent No. 1 enclosing the acknowledged copy of the income tax returns filed on 26.10.2006 and also the order passed under Section 143(2) of the Act for the assessment year 2006-07. The respondent No. 1 however, issued a notice under Section 143 of the Act for the assessment year 2006-07. The respondent No.2 also issued a notice on 5.1.11 calling upon the petitioner to furnish the required documents in respect of the proceedings under Section 92CA of the Act for the assessment year 2006-07.
3. Suffice it to note that the provisions of the Act would contemplate inviting of objections for second notice, which is issued. Accordingly, the petitioners filed their reply, a copy of which is produced at Annexure-P. The respondent No. 1 pursuant to Annexure-L gave his reasons why he proposed to reopen the returns filed by the petitioner. The objections were filed by the petitioner to the said reasons and that objections were over-ruled pursuant to Annexure-C dated 17.10.2011. According to the petitioners the very re-opening of the assessment for the year 2006- 07 is one without jurisdiction, having regard to the fact that it is not forthcoming in the reasons stated that he had a reason to believe that the income chargeable in respect of the assessment year 2006-07 had escaped his attention within the meaning of Section 147 of the Act.
4. I have heard Mr. Chyttanya K.K., the learned counsel appearing for the petitioner as well as Mr M.V. Seshachala, the learned counsel appearing for the Revenue.
5. Mr. Chyttanya K.K, learned counsel appearing for the petitioner in support of the writ petition vehemently contends that a perusal of Annexure-L does not disclose that respondent No. 1 has applied his mind and has recorded the reasons for him to believe that the proceedings are required to be initiated under Section 148 of the Act on the premise that certain transactions have escaped his attention notwithstanding the fact they are reflected in the returns filed by the petitioner. He submits that this cannot be termed as reason to believe to re-open the assessment, which has attained finality pursuant to initiation of proceedings under Section 148 of the Act. In support of his contention he would press into service decisions of the Apex Court.
6. Mr. M.V. Seshachala the learned counsel appearing for Revenue submits that the concept of reason to believe has been rephrased. ‘Reason to believe’ has been dealt by the Apex Court and the Apex Court has opined that what is required to be looked into is not the order passed on the ‘reason to believe’ but the reasons given by the authorities in coming to such a conclusion.
7. In sum and substance his case would be the Court is required to consider the decision making process and not the decision itself.
8. Before considering the rival submissions it is required to note a few of the proceedings, which have taken place during the pendency of the writ petition.
9. Apparently on the basis of the order at Annexure-C, the matter is referred to respondent No.2, the Transfer Pricing who has passed an order, which is the subject matter before the Dispute Redressal Panel.
10. It is submitted by the learned counsel appearing for the petitioner the question of jurisdiction certainly cannot be urged before the Redressal Panel but certainly can be a subject matter of an appeal before the Income Tax Tribunal if the explanation offered by the petitioner is not accepted. But for the present the Court is required to examine as to whether respondent No. 1 has “reason to believe” to reopen the assessment for the year 2006-07. It is not in dispute that for the assessment year 2005-06, the identical transaction, which was reflected in the returns filed by the petitioner was referred to respondent No. 2 Transfer Pricing and on the basis of the material placed, the Transfer Pricing passed an order for the assessment year 2005-06, which is once again the subject matter before the Dispute Redressal Panel.
11. The grievance of the petitioner appears to be that there is no independent application of mind for re-opening the assessment for the year 2006-07 inasmuch as the respondent No. 1 has imported the pricing order passed by respondent No.2 for the assessment year 2005-06 in re-opening the assessment for the year 2006-07.
12. In fact escaping the assessment is referable to Section 147 of the Act. Section 147 of the Act would speak about the fact that the Assessing Officer has a reason to believe that any income chargeable to the tax has escaped assessment for any assessment year such a re-opening is subject to the provisions of sections 148 to 153 of the Act. Indeed, Section 148 of the Act is referable to an income, which is chargeable to the income tax and which has escaped the assessment i.e., assessment/notice and which comes to his notice subsequent in the course of proceedings under the statute. It is open for the assessing officer to re-open the assessment. But however, there is a cap on such reopening of the assessment inasmuch as it is required to be done within a period of four years from the end of the relevant assessment year. In the case on hand it is not the case of the petitioners that re-opening of the assessment is barred by statute. The only grievance is that there is no reason to believe to re-open the assessment, which has attained finality.
13. In the case on hand it is to be noticed that Section 147 of the Act is referable to income escaping assessment. Undoubtedly, the petitioners have reflected the present transactions in the returns filed by them. But however, that had escaped the notice of the Assessing Authority. Hence, I am of the view that the proceedings would squarely fall under Section 147 of the Act. Indeed, the question ‘reason to believe’ fell for consideration before the Apex Court. In the first instance in the case of Johri Lal v. CIT  88 ITR 439 the Apex Court has observed thus :
“……..The formation of the required opinion by the Income Tax Officer is a condition precedent. Without formation of such an opinion he will not have jurisdiction to initiate proceedings under Section 34(1)(a) of the Act. The fulfilment of this condition is not a mere formality but it is mandatory. It is one of the essential pre-condition before proceedings are initiated under Section 147 of the Act.”
14. The Apex Court while considering as to the concept of ‘reason to believe’ has observed thus:
“There can be no manner of doubt with the words reason to believe that the words ‘reason to believe’ suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the ITO may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The ITO would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the Section.”
15. The Apex Court in the case of Calcutta Discount Co. Ltd. v. ITO  41 ITR 191 has observed thus:
“………..The expression “reason to believe” postulates belief and the existence of reasons for that belief. The belief must be held in good faith; it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the Income-tax Officer, the forum of decision as to the existence of reasons and the belief is not in the mind of the Income-Tax Officer.
The existence of the belief and the reasons for the belief but not the sufficiency of the reasons, will be justiciable. The expression therefore predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief.”
16. In the case on hand it is to be noticed that it is a case of income escaping the assessment. It may not be a tax of avoidance but it would be a case of a return, which is filed with all the material escaping the attention of the Assessing Authority. It may be that respondent No. 1 might have derived assistance that his opinion to ‘reason to believe’ on an earlier order passed by the Transfer Pricing for the assessment year 2005-06. It is useful to extract the observations made by the respondent No. 1 in support of his ‘reason to believe’ to re-open the assessment for the year 2006-07.
“A perusal of Form 3 reports reveal that for AY 2005-06, the assessee had arms length transactions with companies like Pharma Systems Inc Pharamapps LLC and Arts Global LLC to the extent of Rs.9.77 crores and adjustment suggested to arms length price is Rs.5.13 crores which is 52% of the such turnover. For AY 2006-07 also, the assessee company had transactions with the same companies to the extent of Rs. 6.99 crores. The adjustment to arms length price for AY 2005-06, clearly indicates, that, the parties with whom the transactions is made, remaining same, there shall be adjustment to the arms length price in similar proportion in AY 2006-07 also.”
17. Indeed, as observed by the Apex Court this Court cannot go into the sufficiency of the reasons provided as long as the reasons are forthcoming.
18. As observed the petitioner is already before the Dispute Redressal Panel. Undoubtedly if the proceedings go against him before the Dispute Redressal Panel, it is always open for him to file an appeal before the Income Tax Tribunal wherein all contentions available to him can be raised. But for the present I am of the view that the reasons given by respondent No. 1 making him to believe to initiate or re-open the assessment for the year 2006- 07 cannot be substituted by this Court by giving its own reasons as to why the reasons given by him are incorrect. Having said so, I am of the view that the question of interference does not arise. Petition stands disposed of accordingly.