In Reopening AO cannot pass Composite Order for Assessment and for rejection of objection

Brief about the case

In the case of JVS Export vs. The Deputy Commissioner of Income Tax, the assessee, being a partnership firm, received notice u/s 148 on the ground that the AO has reason to believe that the income of the petitioner firm chargeable to tax had escaped assessment within the meaning of Section 147 of the Income Tax Act,1961. On query by the assesee the AO furnished reason for issue of notice being stating that there is payment of foreign sales agents commission for which no TDS has been deducted.

Relying on GKN Driveshaft (India) Ltd Vs. ITO (259 IT19)(SC) the petitioner firm filed an objection. Thereafter, the AO passed a composite order dated 05.03.2015 rejecting the objections and also passed the re-assessment order which consequently resulted in filing the current Writ Petition in Madras High Court.

Facts of the case:

• The petitioner firm was selected for detailed scrutiny and an assessment was made under Section 143(3) of the Act for the assessment years 2007-08, 2008-09, 2009-10, 2010-2011.
• While so, nearly more than four years from the end of the respective assessment years, the petitioner received notice under Section 148 of the Income Tax Act, 1961 requiring the petitioner firm to deliver a return of income in the prescribed form within 30 days of receipt of the said notice on the ground that the firm paid commission to foreign agents without deduction of tax.
• The petitioner firm filed objections in response to the reasons stated by AO but the AO rejected the same and passed an order u/s 148.
• The petitioner firm submitted the following :
• If no operation of business is carried out in the taxable territories, then it cannot be deemed to be an income which have either accrued or arisen in India. Therefore, the question of deducting TDS does not arise.
• On receipt of the reasons, the noticee is entitled to file objections to issuance of notice and the assessing officer is bound to dispose of the same by passing a speaking order. But, in the instant case, a non-speaking and composite order has been passed.
• In the absence of any tangible material the AO has no power to review the order.
• Power under Section 147 of the Act can be exercised within four years prior to the end of the relevant assessment year. But for the first two Writ Petitions, it is beyond the period of four years and hence invalid.
• After considering the above submissions, the Madras High Court set forth the following:
• Relying upon a judgment reported in a Division Bench of this Court in Commissioner of Income Tax Vs. Faizan Shoes Pvt.Ltd, T.C.(A).No.789 of 2013, submitted that if the commission amount was paid to the agent who is a non-resident for the service rendered outside India, Section 195 cannot be invoked. The assessee is not liable to deduct tax at source when the non-resident agent provides services outside Indian on payment of commission.
• Applying the principle in GKN Driveshafts (India) Ltd. Vs. Income Tax Officer and Others, (2003) 259 ITR 19 which says that on receipt of reasons, the noticee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order, the HC set aside the non-speaking and composite order in the instant case.
• With regard to the third point the HC emphasized that the AO shall not review his order without any tangible material.
• Regarding the last point, the same is hit by limitation and hence invalid.

Contention of the Revenue

• The revenue thrusted that the AO had tangible reason to reopen his order by issue of notice u/s 147 of the Income Tax Act.
• The AO furnished the reasons stating that there is payment of foreign sales agents commission for which no TDS has been deducted and therefore it resulted in concealment of income.

Contention of the Assessee

• The assessee pleaded that the payment of commission was not covered by section 195 and hence not liable for deduction of tax.
• The non-speaking order passed by AO is invalid and unjustified.
• The AO has no authority to review the order unless tangible material is available.
• Section 147 provides a limitation period of upto 4 years and so the notices issued after the lapse of such period are invalid.

Held by Madras High Court

• Since commission amount was paid to the agent who is a nonresident for the service rendered outside India, Section 195 cannot be invoked and therefore the assessee was not liable to deduct tax at source.
• The procedure for filing and deciding objection to the notice under Section 148 of the Act had been crystallized by the Apex Court in GKN Driveshafts (India) Ltd. Vs. Income Tax Officer and Others, (2003) 259 ITR 19, wherein the Court has held that on receipt of reasons, the noticee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order.
• The AO has no power to reopen assessment in absence of tangible material.
• As per dictum laid by Hon’ble Supreme Court in GKN Driveshafts (India) Ltd. Vs. Income Tax Officer and Others, (2003) 259 ITR 19 that pursuant to the notice issued by the assessing officer, he is bound to consider the objections of the parties and pass a speaking order. But, in the instant case, without passing a separate order by considering the objection of the petitioner, the respondent has passed a composite and non-speaking
  order. Since it is a non-speaking and composite order, the same is liable to be set aside.
• Considering the above matter the Writ petitions were dismissed.