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Reassessment Notice U/s. 148 merely on directions from JCIT or CIT is invalid

Where reassessment proceedings were initiated on the directions from JCIT or CIT and AO had not carried out any independent exercise to examine fresh material to come to a conclusion that the assessment warrants reopening on account of escapement of income, the reassessment was bad in law.

Agfa India (P) Ltd. Vs. Asst. CIT (ITAT Pune)

‘Reason to believe’ that income chargeable to tax has escaped assessment should be of assessing officer. It is assessing officer’s ‘reason to believe’ that taxable income has escaped assessment that forms bedrock for reopening assessment under section 147 of the Act. Directions from JCIT or CIT to issue notice cannot in any manner be construed as assessing officer’s ‘reason to believe’ for initiating reassessment proceedings. The provisions of section 147 in unambiguous terms mandates that the ‘reason to believe’ for reopening assessment should be of assessing officer. In other words the assessing officer should carryout independent exercise to examine fresh material in his possession to come to a conclusion that the assessment warrants reopening on account of escapement of income. In the present case, a perusal of reasons for initiating reassessment proceedings clearly show that they are against the sprit of provisions of section 147 of the Act. The assessing officer has issued notice under section 148 on the directions of JCIT and CIT. Therefore, in our considered opinion the notice issued under section 148 is bad in law and thus, the subsequent proceedings arising there from are vitiated.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

This appeal by the assessee is directed against the order of Commissioner (Appeals)-I, Thane dated 30-4-2015 for the assessment year 2007-08.

2. The assessee has assailed the order of Commissioner (Appeals) by raising following grounds in appeal :–

“1. ”The order of the learned Commissioner (Appeals) on aspects agitated in appeal is contrary to the provisions of law and facts of the case and without appreciation of the facts and circumstances of the case in their right perspective.

2. The learned Commissioner (Appeals) erred in confirming the action of the assessing officer (‘AO’) of re-opening the assessment under section 147 of the Act.

3. The learned Commissioner (Appeals) erred in not appreciating that considering the facts and circumstances of the case and the law prevailing on the subject, the reassessment proceedings are not in accordance with the law and the provisions of the Act. The appellant therefore submits that the reassessment proceedings be held to be bad in law and struck down.

4. The learned Commissioner (Appeals) erred in dismissing the appeal filed by the appellant as infructuous without considering the merits of the case.

5. The learned Commissioner (Appeals) erred in not holding that considering the facts and circumstances of the case and the law prevailing on the subject, the order under section 143(3) read with section 147 is null and void and needs to be quashed.

6. The learned Commissioner (Appeals) erred in not deciding on merit the addition of INR 11,22,74,613 on account of international transactions entered into by the Appellant with its AEs in respect of the medical imaging diagnostic segment (transfer pricing adjustment).

7. Each one of the above grounds of appeal is without prejudice to the other.

8. The appellant reserves the right to amend, alter or add to the grounds of appeal.”

The assessee has also raised additional ground of appeal the same reads as under :–

“1. The learned assessing officer erred in not following the procedure prescribed by the Honorable Supreme Court in the case of GKN Driveshafts (India) Ltd. (2002) (259 ITR 19) and other judgments of the Honorable jurisdictional High Court resulting into reassessment being bad in law and void ab initio requiring its cancellation.”

3. Shri Girish Dave appearing on behalf of the assessee submitted that reassessment proceedings under section 147 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) have been initiated by assessing officer in an illegal manner. The learned Authorized Representative referred to satisfaction note at page 72 of the paper book. The learned Authorized Representative pointed that the assessing officer initiated reassessment proceedings on the directions of Joint Commissioner, Range-1, Thane. The provisions of section 147 mandates that reassessment proceedings can be initiated only if the assessing officer has ‘reason to believe’ that any income chargeable to tax has escaped assessment. It is the opinion and belief of the assessing officer which ignites reassessment proceedings and not the directions of any other superior authority. Further, the learned Authorized Representative submitted that the assessing officer has violated the law laid down by Honorable Supreme Court of India in the case of GKN Driveshafts (India) Ltd. v. ITO & Ors. 259 ITR 19. The Honorable Apex Court has mandated that after issuance of notice under section 148, the proper course of action for the noticee is to file return and if he so desires, seek reasons for issuing notice. The assessing officer is bound to furnish reasons within a reasonable time. The assessee is thereafter required to file objections. The assessing officer before proceeding with the assessment has to dispose of the objections filed by the assessee by passing a speaking order. In the present case, the notice under section 148 was issued to the assessee on 19-1-2012. The assessee vide letter dated 7-2-2012 requested for providing reasons for reopening the assessment. The assessing officer without supplying the reasons for reopening, issued notice under section 143(2) on 30-7-2012 followed by notice under section 142(1) on 11-9-2012. The assessing officer provided reasons for reopening on 20-12-2012 i.e., after initiation of reassessment proceedings.

3.1 The learned Authorized Representative submitted that the assessee filed objections/ submissions against reasons for reopening on 4-1-2013. The assessing officer decided the objections of the assessee on 12-3-2013 and immediately on the next day i.e., 13-3-2013 issued show cause notice in respect of Transfer Pricing adjustment. The assessee could barely file reply to show cause notice on 19-3-2013, immediately thereafter, the assessing officer passed order under section 143(3) read with section 147 of the Act, on 25-3-2013. The sequence of events clearly indicate that the assessing officer passed assessment order in reassessment proceedings in violation of the directions of Honorable Jurisdictional High Court in the case of Asian Paints Ltd. v. Dy. CIT 296 ITR 90. The Honorable High Court has held that in reassessment proceedings where the assessing officer does not accept the objections filed by the assessee, he shall not proceed further in the matter within a period of four weeks from the date of receipt of service of the order on objections, on the assessee. The Hon’ble High Court has granted period of four weeks to the assessee to exhaust the legal remedies available to him against the order of assessing officer rejecting objections. In the present case, the assessing officer in first instance has initiated reassessment proceedings without supplying the reasons of reopening and thereafter in a hasty manner has issued show cause notice on merits without granting period of four weeks after having rejected the objections of assessee.

3.2 The learned Authorized Representative of assessee submitted that the assessee before First Appellate Authority has challenged reopening of assessment under section 147. The Commissioner (Appeals) without adjudicating the issue of reopening has decided the appeal of assessee on merits. The Commissioner (Appeals) was duty bound to first decide the validity of reopening before deciding the issue on merits. To support his submissions, the learned Authorized Representative placed reliance on the decision of Delhi Bench of the Tribunal in the case of Ballarpur Industries Ltd. v. ITO in (IT Appeal Nos. 447 to 449 (Delhi) of 2011 (assessment years 2006-07 to 2008-09), date 10-3-2017). The learned Authorized Representative finally contended that the Commissioner (Appeals) has erred in dismissing the appeal of assessee as infructuous as the Commissioner, Thane had invoked the provisions of section 263 and has set aside the assessment order dated 25-3-2013 passed under section 143(3) read with section 147 of the Act. validity of reopening before deciding the issue on merits. To support his submissions, the learned Authorized Representative placed reliance on the decision of Delhi Bench of the Tribunal in the case of Ballarpur Industries Ltd. v. ITO in (IT Appeal Nos. 447 to 449 (Delhi) of 2011 (assessment years 2006-07 to 2008-09), date 10-3-2017). The learned Authorized Representative finally contended that the Commissioner (Appeals) has erred in dismissing the appeal of assessee as infructuous as the Commissioner, Thane had invoked the provisions of section 263 and has set aside the assessment order dated 25-3-2013 passed under section 143(3) read with section 147 of the Act.

4. On the other hand Shri Rajeev Kumar representing the Department strongly defended the impugned order. The learned Departmental Representative submitted that once the assessment order impugned by the assessee in present appeal has been set aside by the Commissioner in revision proceedings, the present appeal filed by the assessee does not survive. The learned Departmental Representative further contended that reassessment proceedings were carried out in a fair manner. Proper opportunity of hearing has been granted to the assessee at each stage, therefore, no prejudice is caused to the assessee. The assessing officer had sufficient fresh material to initiate reassessment proceedings, therefore, there is no infirmity either at the time of recording satisfaction or the subsequent proceedings. The learned Departmental Representative prayed for dismissing the appeal of assessee.

5. We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. We have also considered various decisions on which the learned Authorized Representative of assessee has placed reliance. 6. In ground Nos. 1 to 5 raised in the grounds of appeal and the additional ground of appeal, the assessee has assailed reopening of assessment under section 147 of the Act. The assessing officer issued notice under section 148 of the Act on 7-2-2012 after recording of satisfaction on 19-1-2012. The copy of satisfaction for initiating reopening of assessment was provided to the assessee vide communication dated 20-12-2012. Before proceeding further it would be necessary to first examine the reasons for initiating reassessment proceedings. The relevant extract of the satisfaction note is reproduced here-in-below :–

6. In ground Nos. 1 to 5 raised in the grounds of appeal and the additional ground of appeal, the assessee has assailed reopening of assessment under section 147 of the Act. The assessing officer issued notice under section 148 of the Act on 7-2-2012 after recording of satisfaction on 19-1-2012. The copy of satisfaction for initiating reopening of assessment was provided to the assessee vide communication dated 20-12-2012. Before proceeding further it would be necessary to first examine the reasons for initiating reassessment proceedings. The relevant extract of the satisfaction note is reproduced here-in-below :–

“In this case, the Addl. CIT, Transfer Pricing-1(1), Mumbai, by virtue of Letter No. Addl. CIT/TP-1(1)/2011-12/788, date 9-1-2008, has informed the Jt.CIT, Range-1, Thane, on 12-1-2012, that income has escaped assessment during the year in question.

The requisite details/bifurcation of the arms length price has been submitted, wherein it is informed that income amounting to more than Rs. 11 crores has escaped assessment for both the years, i.e., 2007-08 and 2008-09 since the assessee has purchased goods from its AE’s by paying prices far more than the ALP. Thus the assessee has wrongly manipulated the bench marking of its international transactions relating to its medical imaging activity.

The Jt. CIT, Range-1, Thane, as per directions, has informed this office on 13-1-2012 to issue necessary notice. Armed with the Transfer Pricing information, the CIT-1, Thane too, vide Letter No. THN/CIT-1/TP/AI/2011-12/2395, dt. 16-1-2012, has given directions to take necessary action.

Based on the above facts and perusal of the information, it is seen that the assessee has overpaid its AE in transaction of import from AE relating to medical imaging segment. The difference had been worked out after holding the benchmark margin of 4.17%. The communication received from the Addl. CIT, Transfer Pricing-1(1), Mumbai is self explanatory in this aspect. As per requirements by the law, the assessee was required to benchmark each international transaction separately. The assessee has clubbed the international transactions of medical imaging segments with its entity level results wherein income has escaped assessment.

Considering the above facts, I have reason to believe that income chargeable to tax has escaped assessment due to the proceedings conducted by the Transfer Pricing Wing within the meaning of section 147 of the Income Tax Act, 1961.

Issued notice under section 148 of the Income Tax Act, 1961.

Sd

(C.T. MATHEWS)

ACIT, Circle-1, Thane”

A perusal of satisfaction note shows that the assessing officer has issued notice under section 148 on the directions of JCIT, Range-1, Thane and CIT-I, Thane. A perusal of satisfaction note shows that the assessing officer has issued notice under section 148 on the directions of JCIT, Range-1, Thane and CIT-I, Thane.

7. The full bench of Honorable Delhi High Court in the case of CIT v. Kelvinator of India Ltd. 256 ITR 1has held that one of the pre conditions for reopening is that the assessing officer must have ‘reason to believe’ that income chargeable to tax has escaped assessment. The relevant extract of the observations of Honorable High Court in this regard are as under :–

“7. From a bare perusal of the provisions contained in section 147 of the said Act, as it stood up to 31-3-1989, it is evident that to confer jurisdiction under section 147(a) of the Act two conditions were required to be satisfied viz., (i) the assessing officer must have reason to believe that income chargeable to tax has escaped assessment; and (2) he must also have a reason to believe that such escapement occurred by reason of either (a) omission or failure on the part of the assessee to make a return of his income under section 139; or (b) omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. The afore- mentioned requirements of law must be held to be conditions precedent for invoking jurisdiction of the assessing officer to reopen the assessment under section 147 of the said Act. It is trite that both the conditions afore- mentioned are cumulative. It is also a well settled principle of law that, in the event, it is found that any of the said two conditions is not fulfilled the notice issued by the assessing officer would be wholly without jurisdiction. The expression “reason to believe” finds place both in clause (a) and (b) of section 147 of the Act. Sub-section (2) of section 148 of the Act mandates that before jurisdiction under section 147 of the Act is invoked by the assessing officer he is to record his reasons for doing so or before issuing any notice under section 147 of the said Act. Therefore, formation of reason to believe and recording of reasons were imperative before the assessing officer could reopen a completed assessment.”

A perusal of above observations of Honorable High Court makes it unambiguous clear that ‘reason to believe’ that income chargeable to tax has escaped assessment should be of assessing officer. It is assessing officer’s ‘reason to believe’ that taxable income has escaped assessment that forms bedrock for reopening assessment under section 147 of the Act. Directions from JCIT or CIT to issue notice cannot in any manner be construed as assessing officer’s ‘reason to believe’ for initiating reassessment proceedings. The provisions of section 147 in unambiguous terms mandates that the ‘reason to believe’ for reopening assessment should be of assessing officer. In other words the assessing officer should carryout independent exercise to examine fresh material in his possession to come to a conclusion that the assessment warrants reopening on account of escapement of income. In the present case, a perusal of reasons for initiating reassessment proceedings clearly show that they are against the sprit of provisions of section 147 of the Act. The assessing officer has issued notice under section 148 on the directions of JCIT and CIT. Therefore, in our considered opinion the notice issued under section 148 is bad in law and thus, the subsequent proceedings arising there from are vitiated.

8. Since, we have held that the proceedings under section 148 are bad on account of fatal defect at the stage of recording satisfaction itself, submissions made by the learned Authorized Representative of assessee in respect of subsequent events have become academic and are thus not dwelled upon.

9. In ground No. 6 of appeal, the assessee has challenged addition of Rs. 11,22,74,613 on merits. Since, the appeal of assessee has been allowed on basic issue of validity of initiation of reassessment proceedings, therefore, this ground has become academic.

10. The ground Nos. 7 and 8 are general in nature, hence require no adjudication.

11. In the result, the impugned order is set aside and the appeal of assessee is allowed.

Categories: Income Tax
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